Wall Street Prep The Premium Package
Review:Accounting&FinancialStatementAnal
ysis Exam.
Score:95%,38correctoutof40
Question1
AssumeUSGAAPtoanswerthisquesti
on.
In2017,$2millioninwageswereearnedandnocashwageswerepaid. In2018,$8
million in wages were earned and $7 million in cash wages were paid. Cash
wages were used to first pay wages earned in 2017 with the remainder
used to pay wages earned in 2018. Any earned but unpaid wages will be
paid during the first quarter of 2019.
Usingonlythe informationprovided, which of thefollowingstatements ismost
accurate?
Liabilitiesincreasedby$1.0millionin2018
Liabilitiesincreasedby$3.0millionin2018
Assetsdecreasedby$5.0millionin2018
Retainedearningsdecreasedby$10.0millionin2018
Retainedearningsdecreasedby$7.0millionin2018
Youransweriscorrect.
Since wages were earned in 2017 but not yet paid, the opening balance sheet
in 2018 would have an accrued wages liability of $2.0. These were paid in
2018, reversing the liability.However,sincethereisonly$5.0millionincash
($7.0lessthe$2.0millionused to pay 2017 wages) available to pay wages
earned in 2018, that leaves $3.0 million in earned wages unpaid, raising the
accrued wages liabilityto $3.0 million. The net impact to the liabilityis $1.0
million (-$2.0 + $3 million). The onlyasset impacted is cash, which decreases
by $7.0 million, while retained earnings decreases by $8.0 million, since
wages are expensed when they are earned, not when they are paid.
SeeLesson:Payable,AccruedExpenses,DeferredRevenue&Debt
Question2
,AcompanyissueditsCEO100,000sharesofrestrictedstockinthebeginningof2018
that are restricted for two years. The current share price is $10. Based on
the information provided, which of the following statements is true?
Anunearnedcompensationliabilityintheamountof$1millioniscreated
atthe grant date
Anunearnedcompensationassetintheamountof$1millioniscreateda
tthe grant date
Stockholders'equityincreasesby$1millionatthegrant date
Anunearnedcompensationcontraequityaccountintheamountof$5
00,000is recognized at the grant date
Stockholders'equityisunchangedatthegrantdate
Youransweriscorrect.
The entire value of restricted stock issued at grant date is recognized as
an equity account and is immediately offset by a contra equity account in
the same amount so
thereisnochangetostockholders’equityatthegrantdate.Thiscontraequityacco
unt is reversed over the service period. In this case, a $1 million contra
equity account is createdand reduced by$500,000over the next two years,
with anoffsettingreduction in retained earnings.
SeeLesson:StockBasedCompensationAccounting:JournalEntries
Question3
AcompanyissueditsCEO100,000stockoptionsinthebeginningof2018that
willvest equally over 2 years. Assume the following:
Thesharepriceatgrantdateis$10pershar
e The option exercise price is $10 per
share
Thefairvalueofeachoptionatgrantdateis$5persh
are No options are exercised until after year 2
Basedonlyontheinformationprovided,whichofthefollowingstatementsistrue?
Stockholders'equityincreasesby$1,000,000atthegrantdate
Stockholders'equityincreasesby$500,000atthegrantdate
Stockholders'equityincreasesby$250,000atthegrantdate
, Stockholders'equitydecreasesby$250,000attheendofyear1
Stockholders'equitydoesnotchangeat theendofyear1
Youransweriscorrect.
Nojournalentriesoccuratthegrantdate.Stockoptionsareexpensedasthey vest with
a corresponding entry in "APIC – Stock options" account. Since both accounts
are part of stockholders’equity,thereisnochangetostockholders’
equity.Noassetorliabilities are recognized on the grant date.
SeeLesson:StockBasedCompensationAccounting:JournalEntries
Question4
Acompanyrecordedthefollowingactivitiesin2018:
$5millionincapitalexpendituresweremadein2018
$4millionindepreciationexpensewasrecognizedin2018
$3millioninaffiliateincomerecognizedon theincomestatementfroma25%
investment in an affiliate
$1millionofinsuranceproceedswerereceivedincashduetohurricanedamageonthe
company’scorporateheadquarters
Basedonlyontheinformationprovided,calculatetheimpactoftheactivitiesdescribed
aboveonthecompany’s2018operatingincomeandcashflows(ignoretaxes).
Operatingincomedecreasedby$1.0million.Cashflowsdecrease
dby$4.0 million.
Operatingincomedecreasedby$5.0million.Cashflowsincrease
dby$6.0 million.
Operatingincomedecreasedby$4.0million.Cashflowsdecrease
dby$4.0 million.
Operatingincomedecreasedby$6.0million.Cashflowsdecrease
dby$1.0 million.
Operatingincomedecreasedby$6.0million.Cashflowsdecrease
dby$3.0 million.
Youransweriscorrect.
Onlythe$4.0millionindepreciationexpenseimpactsoperatingincome.Capital
expenditures are not recognized on the income statement. Affiliate income
and
, insuranceproceedsarerecognizedbelowoperatingincome.
Capexreducescashflows, offset by the $1 million insurance proceeds.
Depreciation is non-cash and the investment income is an accrual – its cash
impact is not provided. See Lessons: All lessons in "Accounting Crash
Course" Chapters 2 (The Income Statement) and 6 (The Cash Flow
Statement).
Question5
Acompanyreportedgrossprofitof$20millionin 2018.Inaddition,itrecordedthe
following activities:
-Salesandmarketingexpenseswere$5million.
-Interestincomewas$2million.
-Soldequipmentfor$5millionthathadanetbookvalueof$9million.
-$3millioninpreferredstockissuance.
-Company’s tax rate is 40%.
Calculatethecompany’snetincome.
$5.4million
$6.0million
$6.8million
$7.2million
$7.8million
Youransweriscorre
ct. Gross profit 20.0
Sellingandmarketingexpenses(5.
0) Interest income 2.0
Loss on sale (4.0)
Pretaxincome13.0
Taxrate40%
Netincome7.80
Review:Accounting&FinancialStatementAnal
ysis Exam.
Score:95%,38correctoutof40
Question1
AssumeUSGAAPtoanswerthisquesti
on.
In2017,$2millioninwageswereearnedandnocashwageswerepaid. In2018,$8
million in wages were earned and $7 million in cash wages were paid. Cash
wages were used to first pay wages earned in 2017 with the remainder
used to pay wages earned in 2018. Any earned but unpaid wages will be
paid during the first quarter of 2019.
Usingonlythe informationprovided, which of thefollowingstatements ismost
accurate?
Liabilitiesincreasedby$1.0millionin2018
Liabilitiesincreasedby$3.0millionin2018
Assetsdecreasedby$5.0millionin2018
Retainedearningsdecreasedby$10.0millionin2018
Retainedearningsdecreasedby$7.0millionin2018
Youransweriscorrect.
Since wages were earned in 2017 but not yet paid, the opening balance sheet
in 2018 would have an accrued wages liability of $2.0. These were paid in
2018, reversing the liability.However,sincethereisonly$5.0millionincash
($7.0lessthe$2.0millionused to pay 2017 wages) available to pay wages
earned in 2018, that leaves $3.0 million in earned wages unpaid, raising the
accrued wages liabilityto $3.0 million. The net impact to the liabilityis $1.0
million (-$2.0 + $3 million). The onlyasset impacted is cash, which decreases
by $7.0 million, while retained earnings decreases by $8.0 million, since
wages are expensed when they are earned, not when they are paid.
SeeLesson:Payable,AccruedExpenses,DeferredRevenue&Debt
Question2
,AcompanyissueditsCEO100,000sharesofrestrictedstockinthebeginningof2018
that are restricted for two years. The current share price is $10. Based on
the information provided, which of the following statements is true?
Anunearnedcompensationliabilityintheamountof$1millioniscreated
atthe grant date
Anunearnedcompensationassetintheamountof$1millioniscreateda
tthe grant date
Stockholders'equityincreasesby$1millionatthegrant date
Anunearnedcompensationcontraequityaccountintheamountof$5
00,000is recognized at the grant date
Stockholders'equityisunchangedatthegrantdate
Youransweriscorrect.
The entire value of restricted stock issued at grant date is recognized as
an equity account and is immediately offset by a contra equity account in
the same amount so
thereisnochangetostockholders’equityatthegrantdate.Thiscontraequityacco
unt is reversed over the service period. In this case, a $1 million contra
equity account is createdand reduced by$500,000over the next two years,
with anoffsettingreduction in retained earnings.
SeeLesson:StockBasedCompensationAccounting:JournalEntries
Question3
AcompanyissueditsCEO100,000stockoptionsinthebeginningof2018that
willvest equally over 2 years. Assume the following:
Thesharepriceatgrantdateis$10pershar
e The option exercise price is $10 per
share
Thefairvalueofeachoptionatgrantdateis$5persh
are No options are exercised until after year 2
Basedonlyontheinformationprovided,whichofthefollowingstatementsistrue?
Stockholders'equityincreasesby$1,000,000atthegrantdate
Stockholders'equityincreasesby$500,000atthegrantdate
Stockholders'equityincreasesby$250,000atthegrantdate
, Stockholders'equitydecreasesby$250,000attheendofyear1
Stockholders'equitydoesnotchangeat theendofyear1
Youransweriscorrect.
Nojournalentriesoccuratthegrantdate.Stockoptionsareexpensedasthey vest with
a corresponding entry in "APIC – Stock options" account. Since both accounts
are part of stockholders’equity,thereisnochangetostockholders’
equity.Noassetorliabilities are recognized on the grant date.
SeeLesson:StockBasedCompensationAccounting:JournalEntries
Question4
Acompanyrecordedthefollowingactivitiesin2018:
$5millionincapitalexpendituresweremadein2018
$4millionindepreciationexpensewasrecognizedin2018
$3millioninaffiliateincomerecognizedon theincomestatementfroma25%
investment in an affiliate
$1millionofinsuranceproceedswerereceivedincashduetohurricanedamageonthe
company’scorporateheadquarters
Basedonlyontheinformationprovided,calculatetheimpactoftheactivitiesdescribed
aboveonthecompany’s2018operatingincomeandcashflows(ignoretaxes).
Operatingincomedecreasedby$1.0million.Cashflowsdecrease
dby$4.0 million.
Operatingincomedecreasedby$5.0million.Cashflowsincrease
dby$6.0 million.
Operatingincomedecreasedby$4.0million.Cashflowsdecrease
dby$4.0 million.
Operatingincomedecreasedby$6.0million.Cashflowsdecrease
dby$1.0 million.
Operatingincomedecreasedby$6.0million.Cashflowsdecrease
dby$3.0 million.
Youransweriscorrect.
Onlythe$4.0millionindepreciationexpenseimpactsoperatingincome.Capital
expenditures are not recognized on the income statement. Affiliate income
and
, insuranceproceedsarerecognizedbelowoperatingincome.
Capexreducescashflows, offset by the $1 million insurance proceeds.
Depreciation is non-cash and the investment income is an accrual – its cash
impact is not provided. See Lessons: All lessons in "Accounting Crash
Course" Chapters 2 (The Income Statement) and 6 (The Cash Flow
Statement).
Question5
Acompanyreportedgrossprofitof$20millionin 2018.Inaddition,itrecordedthe
following activities:
-Salesandmarketingexpenseswere$5million.
-Interestincomewas$2million.
-Soldequipmentfor$5millionthathadanetbookvalueof$9million.
-$3millioninpreferredstockissuance.
-Company’s tax rate is 40%.
Calculatethecompany’snetincome.
$5.4million
$6.0million
$6.8million
$7.2million
$7.8million
Youransweriscorre
ct. Gross profit 20.0
Sellingandmarketingexpenses(5.
0) Interest income 2.0
Loss on sale (4.0)
Pretaxincome13.0
Taxrate40%
Netincome7.80
