For the year ended October 31, 2017
Retained Earnings, November 1, 2016 $ 250,000
Net income for the year 80,000
Less dividends (50,000)
Retained Earnings, October 31, 2017 $ 280,000
Diff: 3 Type: ES
L.O.: 1-2
CPA COMPETENCIES: Chapter 1
1.1.1 Evaluates financial reporting needs
1.1.2 Evaluates the appropriateness of the basis of financial reporting
1.1.3 Evaluates reporting processes to support reliable financial reporting
98) A cash flow statement is divided into the following sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. For each of the following events, state the section in which it would be listed.
a. Paid cash to retire long-term note payable
b. Payment of wages
c. Issuance of shares
d. Purchase of land
e. Amortization expense
f. Payment of dividends
g. Sale of equipment
h. Equipment rental fee
Answer:
a. financing activity
b. operating activity
c. financing activity
d. investing activity
e. operating activity (be careful - it is a non-cash item but still shows up here)
f. financing activity
g. investing activity
h. operating activity
Diff: 3 Type: ES
L.O.: 1-2
CPA COMPETENCIES: Chapter 1
1.1.1 Evaluates financial reporting needs
1.1.2 Evaluates the appropriateness of the basis of financial reporting
1.1.3 Evaluates reporting processes to support reliable financial reporting
99) A company's management makes three major types of decisions on an ongoing basis: decisions regarding operating activities, decisions regarding investing activities, and decisions regarding financing activities. Discuss each of these three types of activities, including examples of each type.
Answer: Operating activities relate to deciding how to operate the business and involves decisions such as what products and/or services to sell, what prices to sell those products and services for, and how to market those products and services. Investing activities relate to deciding what kinds of investments to make and involve decisions such as what types of non-current assets to buy. Financing activities relate to deciding how to finance the company's operations and involve decisions such as whether to obtain cash by selling shares or by borrowing from a bank.
Diff: 2 Type: ES
L.O.: 1-2
CPA COMPETENCIES: Chapter 1
1.1.1 Evaluates financial reporting needs
1.1.2 Evaluates the appropriateness of the basis of financial reporting
1.1.3 Evaluates reporting processes to support reliable financial reporting
100) What do shareholders look for when reviewing and analyzing the income statement?
Answer: When reviewing the income statement, shareholders look for steadily increasing levels of net income over time. Net income on an income statement means the company is profitable. A steady increase in net income indicates the company's profits are solid. Net income affects both stock prices and future dividends. A shareholder's personal wealth will be enhanced through an increase in the market price of the company's stock and future dividends to be received.