WALL STREET PREP ACCOUNTING & FINANCIAL STATEMENT ANALYSIS EXAM REVIEW| ACCOUNTING CRASH COURSE EXAM V4 FROM WALL STREET PREP

Score: 95%, 38 correct out of 40 QUESTION 1 Assume US GAAP to answer this question. In 2017, $2 million in wages were earned and no cash wages were paid. In 2018, $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. Using only the information provided, which of the following statements is most accurate? a) Liabilities increased by $1.0 million in 2018 b) Liabilities increased by $3.0 million in 2018 c) Assets decreased by $5.0 million in 2018 d) Retained earnings decreased by $10.0 million in 2018 e) Retained earnings decreased by $7.0 million in 2018 Your answer is correct. 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, since there is only $5.0 million in cash ($7.0 less the $2.0 million used to pay 2017 wages) available to pay wages earned in 2018, that leaves $3.0 million in earned wages unpaid, raising the accrued wages liability to $3.0 million. The net impact to the liability is $1.0 million (-$2.0 + $3 million). The only asset 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. See Lesson: Payable, Accrued Expenses, Deferred Revenue & Debt QUESTION 2 A company issued its CEO 100,000 shares of restricted stock in the beginning of 2018 that are restricted for two years. The current share price is $10. Based on the information provided, which of the following statements is true? a) An unearned compensation liability in the amount of $1 million is created at the grant date b) An unearned compensation asset in the amount of $1 million is created at the grant date c) Stockholders' equity increases by $1 million at the grant date d) An unearned compensation contra equity account in the amount of $500,000 is recognized at the grant date e) Stockholders' equity is unchanged at the grant date Your answer is correct. 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 there is no change to stockholders' equity at the grant date. This contra equity account is reversed over the service period. In this case, a $1 million contra equity account is created and reduced by $500,000 over the next two years, with an offsetting reduction in retained earnings. See Lesson: Stock Based Compensation Accounting: Journal Entries Question 3 A company issued its CEO 100,000 stock options in the beginning of 2018 that will vest equally over 2 years. Assume the following: The share price at grant date is $10 per share The option exercise price is $10 per share The fair value of each option at grant date is $5 per share No options are exercised until after year 2 Based only on the information provided, which of the following statements is true? a) Stockholders' equity increases by $1,000,000 at the grant date b) Stockholders' equity increases by $500,000 at the grant date c) Stockholders' equity increases by $250,000 at the grant date d) Stockholders' equity decreases by $250,000 at the end of year 1 e) Stockholders' equity does not change at the end of year 1 Your answer is correct. No journal entries occur at the grant date. Stock options are expensed as they vest with a corresponding entry in "APIC - Stock options" account. Since both accounts are part of stockholders' equity, there is no change to stockholders' equity. No asset or liabilities are recognized on the grant date. See Lesson: Stock Based Compensation Accounting: Journal Entries QUESTION 4 A company recorded the following activities in 2018: $5 million in capital expenditures were made in 2018 $4 million in depreciation expense was recognized in 2018 $3 million in affiliate income recognized on the income statement from a 25% investment in an affiliate $1 million of insurance proceeds were received in cash due to hurricane damage on the company's corporate headquarters Based only on the information provided, calculate the impact of the activities described above on the company's 2018 operating income and cash flows (ignore taxes). a) Operating income decreased by $1.0 million. Cash flows decreased by $4.0 million. b) Operating income decreased by $5.0 million. Cash flows increased by $6.0 million. c) Operating income decreased by $4.0 million. Cash flows decreased by $4.0 million. d) Operating income decreased by $6.0 million. Cash flows decreased by $1.0 million. e) Operating income decreased by $6.0 million. Cash flows decreased by $3.0 million. Your answer is correct. Only the $4.0 million in depreciation expense impacts operating income. Capital expenditures are not recognized on the income statement. Affiliate income and insurance proceeds are recognized below operating income. Capex reduces cash flows, 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). Question 5 A company reported gross profit of $20 million in 2018. In addition, it recorded the following activities: -Sales and marketing expenses were $5 million. -Interest income was $2 million. -Sold equipment for $5 million that had a net book value of $9 million. -$3 million in preferred stock issuance. -Company's tax rate is 40%. Calculate the company's net income. a) $5.4 million b) $6.0 million c) $6.8 million d) $7.2 million e) $7.8 million Your answer is correct. Gross profit 20.0 Selling and marketing expenses (5.0) Interest income 2.0 Loss on sale (4.0) Pretax income 13.0 Tax rate 40% Net income 7.80 Loss on sale is calculated as the sale price less the net book value. See Lesson: Net Income, EPS & Dividends Question 6