Equity Changes - Test Bank | Edition 1st

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Chapter 10

Equity Changes

Test Bank

True/False Questions

1. Any change to contributed capital appears on the statement of comprehensive income and is included in contributed capital on the statement of financial position.

Page: p546

1. Payment of dividends appears on the statement of changes in equity or the notes, and is deducted from retained earnings on the statement of financial position.

Page: p546

1. An investment in own shares is reported on the statement of comprehensive income, the statement of changes in equity and is reported as part of a contra account in equity on the statement of financial position.

Page: p546

1. Profit or loss are reported in the statement of comprehensive income, statement of changes in equity and is included in retained earnings on the statement of financial position.

Page: p546

1. Three major types of transactions affect contributed capital: 1) the payment of cash dividends, 2) the repurchase of own shares and 3) the issuance of ordinary or preference shares.

Page: p546

1. Two types of transactions increase or decrease retained earnings: 1) dividends and 2) profit or loss.

Page: p547

1. A revaluation of property, plant and equipment or intangible costs would affect reserves in the equity section of the statement of financial position.

Page: p547

1. The distribution of a scrip dividend would affect reserves in the equity section of the statement of financial position.

Page: p547

1. When cash is used to reacquire shares of the business, an expense would result on the statement of comprehensive income.

Page: p548

1. Reporting entity’s have the option of reporting profit or loss and other comprehensive income on two separate statements.

Page: p549

1. Expenses on the statement of comprehensive income can be reported either by nature or function.

Page: p550

1. Examples of expense categories reported by function include depreciation, materials purchases and employee benefits.

Page: p550

1. Revenue is measured by the fair value of the consideration given in the transaction.

Page: p554

1. The following is one of the criteria to determine whether revenue for goods should be recognized: The business no longer has control over the goods sold.

Page: p555

1. The following is one of the criteria to determine whether revenue for goods should be recognized: The cash has been received by the business even if the journal entry has not been made to record the cash receipt.

Page: p555

1. FOB destination means that the buyer assumes ownership and thus responsibility when the carrier delivers the goods to the buyer.

Page: p555

1. Revenue for services should be recognized based on how complete the services are.

Page: p556

1. To recognize service revenue, the amount of costs, associated costs, stage of completion and exact completion date must be known.

Page: p556

1. Revenue from interest, royalties and dividends is generally recognized when the cash is received.

Page: p558

1. A value added tax (VAT) is assessed on the value added to goods and services at each stage of production.

Page: p559

1. A sales tax is levied on the total value of the goods or services at the point of sale.

Page: p559

1. A gain or loss is always recognized as part of other comprehensive income.

Page: p564

1. A gain or loss which does not qualify as revenue or expenses, respectively, in the ordinary course of business can sometimes still be recognized as part of profit or loss.

Page: p564

1. A gain or loss recognized as other comprehensive income would be included in profit or loss on the statement of comprehensive income.

Page: p564

1. If equipment is impaired during the current period and in a previous period had been revalued upwards, the revaluation reserve would first be decreased up to its balance, and the remainder of the impairment loss would be recognized in profit or loss.

Page: p566

1. The gross profit and profit margin ratios are both solvency ratios.

Page: p570

1. Baxtier Incorporated reported €150 000 in revenue for the year. Gross profit was €70 000 and net profit was €20 000. The profit margin ratio is 13%.

Page: p570

1. Marzya Ltd reported $44 000 in revenue for the year with a gross profit of $30 000 and a net profit was $25000. The gross profit ratio is 43%.

Page: p570

1. Return on investments is calculated by dividing profit + interest expense (1 – tax rate) by average total assets.

Page: p571

Multiple Choice Questions

1. Which of the following is true about reporting profit or loss in the financial statements?
   1. Profit and loss is reported only on the statement of changes in equity
   2. Profit and loss is included in retained earnings on the statement of financial position
   3. Profit and loss is reported on the statement of comprehensive income
   4. All of the above are true

Page: p546

1. Which of the following is not true about reporting an investment in own shares?
   1. The gain or loss on an investment in own shares is reported on the statement of comprehensive income in the period in which the shares are reacquired
   2. Investment in own shares is reported as a contra account in equity
   3. Investment in own shares is reported in the statement of changes in equity
   4. Investment in own shares is reported on the statement of financial position

Page: p546

1. Which of the following is not true about reporting a change to contributed capital?
   1. A change to contributed capital is reported in the statement of changes in equity
   2. A change to contributed capital is not reported in the statement of comprehensive income
   3. A change to contributed capital is included in contributed capital in equity
   4. A change to contributed capital is reported as a contra account in the statement of financial position

Page: p546

1. Which of the following major transactions types do not affect contributed capital?
   1. A scrip dividend
   2. Issuance of ordinary or preference shares
   3. A change in share price
   4. Repurchase of own shares

Page: p546

1. Which of the following would not affect retained earnings?
   1. Profit as reported in the statement of comprehensive income
   2. Cash dividends
   3. A change in a revaluation reserve
   4. Loss as reported in the statement of comprehensive income

Page: p547

1. Which of the following is not a transaction identified in IFRS that affects reserves?
   1. Gains and losses on the sale of plant and equipment and intangible assets
   2. Gains and losses related to the transaction of foreign currencies
   3. Gains and losses related to available-for-sale financial assets
   4. Gains and losses related to certain types of employee benefits

Page: p547

1. Which of the following is not one of the criteria for recognizing revenue for goods?
   1. When the business no longer has control over the good sold
   2. When the business hands the goods over to the carrier
   3. When it is probable that the economic benefits of the sale will flow to the business
   4. When the amount of revenues and the costs associated with that revenue can be reliably measured

Page: p555

1. Which is not true regarding the recognition of revenue related to services?
   1. Revenue is recognized when the service is substantially complete
   2. The economic benefits from the service revenue transaction must flow to the business entity
   3. Associated costs must be able to be reliably measured
   4. Stage of completion must be able to be reliability measured

Page: p556

1. Which of the following is not a reason for recognizing an expense?
   1. When expenditure produces no future economic benefit that would qualify as recognition of an asset on the statement of financial position
   2. Asset costs are systematically allocated such as depreciation of property, plant and equipment and amortization of intangible costs
   3. When a liability is incurred with the recognition of an asset
   4. Costs are matched to revenue on the basis of a direct association between the cost incurred and the earning of specific revenue

Page: p562

1. Lawchak, Inc. reported $414 000 in profit for 2011 with a profit margin ratio of 20%. Cost of goods sold was $600 100. What was the gross margin ratio?
   1. 71%
   2. 80%
   3. 29%
   4. The answer cannot be determined from information provided

Page: p570

1. Van Houton Corporation has a gross profit ratio of 24%. Cost of goods sold was ¥700 000 000. The tax rate was 32%. What is the profit or loss than Van Houten reported in the same period?
   1. ¥168 000 000
   2. ¥476 000 000
   3. ¥323 680 000
   4. The answer cannot be determined from the information provided

Page: p570

Essay Questions

1. List the criteria to determine if revenue for the sale of goods has been earned.
2. List and describe the two basic methods of shipping goods.
3. Discuss the criteria for recognizing service revenues.
4. When should revenue from interest, royalties and dividends be recognized?
5. Discuss the difference between a value added tax and a sales tax.
6. List and explain the four reasons that expenses are recognized.

Answer

Expenses are recognized for one of four reasons:

1. Costs are matched to revenue on the basis of a direct association between the cost incurred and the earning of specific revenue.
2. The systematic allocation of asset costs such as depreciation of property, plant and equipment and amortization of intangible assets.
3. When expenditure produces no future economic benefit that would qualify as recognition of an asset on the statement of financial position. For example, research expenditures are not capitalized but are expensed in the current period.
4. When a liability is incurred without the recognition of an asset. For example, employees have rendered services for which the business has not paid.