CFR 1 QUIZ 1

Chapters 1, 2, and 4

Total marks: 36 + 9 + 10

Total time: 38 + 12 + 10 minutes

Question 1 (14 points)

William and Smith Enterprise provide the following useful information for year 2020:

Before tax gain from sale of investments $ 1,500

Net of tax loss from discontinued operations 2,500

Net of tax loss from disposal of discontinued division 3,500

Income before tax from operations 125,000

Net of tax, unrealized securities gain 12,000

William and Smith Enterprise have a 27% tax rate. The unrealized gain has been recorded as other
comprehensive income.

Required:

Given that the company prepares statement of comprehensive income, determine the following:

a. Income from continuing operations (IOP)

b. Net income (NI)
c. Other comprehensive income (OCI)
d. Total comprehensive income (TCI)
e. If John Smith holds 75% shares (32,250 shares) of the company, determine the non-controlling
interest in the company held by all other shareholders. (NCI)
f. Given that John Smith owns only 75%, determine the basic earnings per share (EPS1)
g. If the company has paid $1000 in dividend to preferred shareholders, what will be the basic
EPS2?

Note: Where required, round off your answers to TWO decimal places.
IOP{92345} NI{86345} OCI{12000}

TCI{98345} NCI{24586.25} EPS1{2.01} EPS2{1.98}

Question 2 (9 points)

William and Smith Enterprise provide the following information for year ending December 31 2019:

Sales revenue $680,000

Cost of sales $425,750
Operating expenses $75,000
Unrealized gain on investments (net of $5,000 tax) $25,000

As of January 1, 2019, the company has the following account balances:

Ordinary shares $480,000

Accumulated other comprehensive income $177,000
Retained earnings $50,000

Additional information

 During the year 2019, the company did not issue any ordinary shares.
 During the month of November 2019, the company declared and paid a dividend of $45,000.
 In line with IFRS 9, the company reports its unrealized gains/losses on investments related to
other comprehensive income under other comprehensive income.
 On February 6, 2020, an understatement in travel expense of $80,000 from 2018 is discovered.
The books for 2018 are closed.
 The company uses a tax rate of 27%.

Note: Where required, round off your answers to ZERO decimal places.

Required:

Determine the following:

a. Total Beginning Balance as reported in statement of changes in equity

b. Net Income
c. Total Ending Balance as reported in statement of changes in equity

a{707000} b{130853} c{759453}

Question 3 (8 points)

William and Smith Enterprise have the following changes in their accounts for the year 2020:

Account increase
(decrease)
Accounts payable $(23,400)
Accounts receivable 15,800
Bonds payable 46,500
Cash 41,670
Contributed surplus* 18,600
Intangible assets 14,000
Inventory 218,400
Investments 46,500
Ordinary shares 87,000
Retained earnings ??
Unearned revenue 45,200

* Contributed surplus represents assets donated

by stockholders or gains from shares transacti ons.

Required:

For the year 2020, the only increase in retained earnings is due to the net income for the year. The
company paid a dividend of $44,000 in 2020. Using the accounting equation (Assets = Equity +
Liabilities), determine the following:

a. Increase in total assets

b. Increase in total liabilities
c. Increase in retained earnings
d. Net income for the year 2020

a{243370} b{68300} c{69470} d{113470}

Short questions (12 minutes and 9 points)

Question 1 (5 pints)
William and Smith Enterprise is an IT service provider. In 2020, the firm’s net income surpassed market
expectations by 8%. The company’s income statement shows that the net income figure also includes a
large gain on sale of a non-current asset. Moreover, the company also changed its inventory valuation
method from FIFO to weighted average cost. This has resulted in a significant drop in cost of goods sold.
The notes to the financial statements fully disclosed the change in inventory valuation method. It is
noted that other companies in the IT industry use FIFO to value their inventory.

Required:

a. Given the information above, do you think that the quality of the company’s earnings is high?
[3]
b. Given your answer in part a, would you be willing to invest in this company? [2]

Solution:

a. Quality of Earnings: In terms of earnings quality, there are issues. The company’s net income
includes a significant gain on sale of idle assets, which means that a sizeable portion of earnings
were not generated from ongoing core business activities. Wozzie also changed their inventory
policy from FIFO to weighted average, which is contrary to the method used within their
industry sector. This is cause for concern as it raises questions about whether management is
purposely trying to manipulate income. A change in accounting policy is only allowed as a result
of changes in a primary source of GAAP or may be applied voluntarily by management to
enhance the relevance and reliability of information contained in the financial statements for
IFRS. Unless Wozzie’s inventory pricing is better reflected by the weighted average method,
contrary to the other companies in their industry sector, the measurement of inventory and cost
of goods sold may be biased.

b. Investing in the Company: Investors and analysts will review the financial statements and see
that part of the company’s net income results from a significant gain generated from non-core
business activities (the sale of idle assets) and will also detect the lower cost of goods sold
resulting from the change in inventory pricing policy disclosed in the notes to the financial
statements. As a result, investors will assess the earnings reported as lower quality, and the
capital markets will discount the earnings reported to compensate for the biased information.
Had Wozzie not fully disclosed the accounting policy change for inventory, the market may have
taken a bit longer to discount that portion of the company’s net income due to lower quality
information.

2. Define the conceptual framework and discuss why is it needed? (3)

3. Discuss the any two qualitative characteristics of useful information. (4)
4. What is the hierarchy of IFRS? (2)
MCQs (10 minutes, 10 points)

1. A conceptual framework for financial reporting is:

a. A set of financial reporting standards

b. A set of regulations which govern financial reporting
c. A set of principles which underpin financial reporting
d. A set of items which make up an entity's financial statements

2. Admittedly the primary interest of shareholders of a company will be the discharge of stewardship by
the directors and the profitability of their business. Nevertheless they will be watchful of the company’s
liquidity levels as well for the following reasons:

i) Liquidity problems will result in failure to take advantage of profit making opportunities

ii) Faced with liquidity problems the company may not pay dividends

iii) Low liquidity may result in resignation of company directors

iv) If liquidity is low the company may not be able to pay its creditors in time

Which of the above statements are correct?

a. All four
b. ii, iii, & iv
c. i & ii
d. i, ii & iv

3. The enhancing qualitative characteristics of financial information include:

a. Relevance and timeliness

b. Relevance and faithful representation
c. Understandability and faithful representation
d. Comparability and understandability

4. Which of the following is not a contributory factor towards faithful representation?

a. Consistency
 b. Neutrality
c. Freedom from error
d. Completeness

5. Allowing a choice of alternative accounting treatments improves the consistency and comparability of
financial statements. True or False?

6. If the current cost measurement basis is used, assets are measured at:

a. Present value
b. Replacement cost
c. The amount paid to acquire them
d. The amount which could be obtained by selling them

7. Under the concept of physical capital maintenance, profit is defined in terms of the increase in an
entity's operating capability during an accounting period. True or False?

8. Recognition is the process of:

a. Disclosing information in the notes to the financial statements

b. Determining where an item should be presented in the financial statements
c. Incorporating an item in the financial statements
d. Determining the amount at which an item should be shown in the financial statements

9. Accounting concepts must be defined clearly and well understood by both who prepare financial
statements and use the information therein for decision making because of the following reasons:

i) The information in financial statements then become more meaningful

ii) It would assist accountants to account for unusual transactions

iii) It would assist Standard Makers to be consistent in their pronouncements

iv) It would improve comparability of financial statements

Which of the above statements are correct?

a. i, ii & iii
 b. i & ii
c. All four
d. ii, iii, & iv

10. Which of the following statements is incorrect:

a. Non aggregation rule is applied when comparing cost and net realisable value of inventory
b. A transaction is accounted according to its legal form rather than its commercial substance
c. Non current assets are depreciated to comply with the matching concept
d. Comparability of financial statements are impaired unless consistency concept is applied