C is correct. IAS No. 1 states that expenses may be categorized by either nature or function.
C is correct. Cost of goods sold is a classification by function. The other two expenses represent classifications by nature.
C is correct. Gross margin is revenue minus cost of goods sold. Answer A represents net income, and B represents operating income.
B is correct. Under IFRS, income includes increases in economic benefits from increases in assets, enhancement of assets, and decreases in liabilities.
B is correct. Net revenue is revenue for goods sold during the period less any returns and allowances, or $1,000,000 minus $100,000 = $900,000.
A is correct. Apex is not the owner of the goods and should only report its net commission as revenue.
C is correct. Under the converged accounting standards, the incremental costs of obtaining a contract and certain costs incurred to fulfill a contract must be capitalized. If a company expensed these incremental costs in the years prior to adopting the converged standards, all else being equal, its profitability will appear higher under the converged standards.
B is correct. Under the first in, first out (FIFO) method, the first 10,000 units sold came from the October purchases at £10, and the next 2,000 units sold came from the November purchases at £11.
C is correct. Under the weighted average cost method:
October purchases
10,000 units
$100,000
November purchases
5,000 units
$55,000
Total
15,000 units
$155,000
$155,000/15,000 units = $10.3333 × 12,000 units = $124,000.
B is correct. The last in, first out (LIFO) method is not permitted under IFRS. The other two methods are permitted.
A is correct. Straight-line depreciation would be ($600,000 − $50,000)/10, or $55,000.
C is correct. Double-declining balance depreciation would be $600,000 × 20 percent (twice the straight-line rate). The residual value is not subtracted from the initial book value to calculate depreciation. However, the book value (carrying amount) of the asset will not be reduced below the estimated residual value.
C is correct. This would result in the highest amount of depreciation in the first year and hence the lowest amount of net income relative to the other choices.
A is correct. A fire may be infrequent, but it would still be part of continuing operations and would be reported in the profit and loss statement. Discontinued operations relate to a decision to dispose of an operating division.
C is correct. If a company changes an accounting policy, the financial statements for all fiscal years shown in a company’s financial report are presented, if practical, as if the newly adopted accounting policy had been used throughout the entire period; this retrospective application of the change makes the financial results of any prior years included in the report comparable. Notes to the financial statements describe the change and explain the justification for the change.
C is correct. The weighted average number of shares outstanding for 2009 is 1,050,000. Basic earnings per share would be $1,000,000 divided by 1,050,000, or $0.95.
B is correct. The formula to calculate diluted EPS is as follows:
Diluted EPS = (Net income − Preferred dividends)/[Weighted average number of shares outstanding + (New shares that would have been issued at option exercise − Shares that could have been purchased with cash received upon exercise) × (Proportion of year during which the financial instruments were outstanding)].
The underlying assumption is that outstanding options are exercised, and then the proceeds from the issuance of new shares are used to repurchase shares already outstanding:
Proceeds from option exercise = 100,000 × $20 = $2,000,000
Shares repurchased = $2,000,000/$25 = 80,000
The net increase in shares outstanding is thus 100,000 − 80,000 = 20,000. Therefore, the diluted EPS for CWC = ($12,000,000 − $800,000)/2,020,000 = $5.54.
A is correct. Basic and diluted EPS are equal for a company with a simple capital structure. A company that issues only common stock, with no financial instruments that are potentially convertible into common stock has a simple capital structure. Basic EPS is calculated using the weighted average number of shares outstanding.
B is correct. LB has warrants in its capital structure; if the exercise price is less than the weighted average market price during the year, the effect of their conversion is to increase the weighted average number of common shares outstanding, causing diluted EPS to be lower than basic EPS. If the exercise price is equal to the weighted average market price, the number of shares issued equals the number of shares repurchased. Therefore, the weighted average number of common shares outstanding is not affected, and diluted EPS equals basic EPS. If the exercise price is greater than the weighted average market price, the effect of their conversion is anti-dilutive. As such, they are not included in the calculation of basic EPS. LB’s basic EPS is $1.22 [= ($3,350,000 − $430,000)/2,400,000]. Stock dividends are treated as having been issued retroactively to the beginning of the period.
A is correct. With stock options, the treasury stock method must be used. Under that method, the company would receive $100,000 (10,000 × $10) and would repurchase 6,667 shares ($100,000/$15). The shares for the denominator would be:
Shares outstanding
1,000,000
Options exercises
10,000
Treasury shares purchased
(6,667)
Denominator
1,003,333
C is correct.
Diluted EPS = (Net income)/(Weighted average number of shares outstanding + New common shares that would have been issued at conversion)
= $200,000,000/[50,000,000 + (2,000,000 × 2)]
= $3.70
The diluted EPS assumes that the preferred dividend is not paid and that the shares are converted at the beginning of the period.
A is correct. When a company has stock options outstanding, diluted EPS is calculated as if the financial instruments had been exercised and the company had used the proceeds from the exercise to repurchase as many shares as possible at the weighted average market price of common stock during the period. As a result, the conversion of stock options increases the number of common shares outstanding but has no effect on net income available to common shareholders. The conversion of convertible debt increases the net income available to common shareholders by the after-tax amount of interest expense saved. The conversion of convertible preferred shares increases the net income available to common shareholders by the amount of preferred dividends paid; the numerator becomes the net income.
B is correct. Common size income statements facilitate comparison across time periods (time-series analysis) and across companies (cross-sectional analysis) by stating each line item of the income statement as a percentage of revenue. The relative performance of different companies can be more easily assessed because scaling the numbers removes the effect of size. A common size income statement states each line item on the income statement as a percentage of revenue. The standardization of each line item makes a common size income statement useful for identifying differences in companies’ strategies.
C is correct. Comprehensive income includes both net income and other comprehensive income.
Other comprehensive income = Unrealized gain on available-for-sale securities − Unrealized loss on derivatives accounted for as hedges + Foreign currency translation gain on consolidation
= $5 million − $3 million + $2 million
= $4 million
Alternatively,
Comprehensive income − Net income = Other comprehensive income
Net income is $15 million, so other comprehensive income is $4 million.
A is correct. Other comprehensive income includes items that affect shareholders’ equity but are not reflected in the company’s income statement. In consolidating the financial statements of foreign subsidiaries, the effects of translating the subsidiaries’ balance sheet assets and liabilities at current exchange rates are included as other comprehensive income.