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Wall Street Prep The Premium Package Review Accounting & Financial Statement Analysis Exam 2023
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lOMoARcPSD|1670110Wall Street Prep The Premium Package
Review: Accounting & Financial
Statement Analysis Exam 2023
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?
Liabilities increased by $1.0 million in 2018
Liabilities increased by $3.0 million in 2018
Assets decreased by $5.0 million in 2018
Retained earnings decreased by $10.0 million in 2018
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.
Question 2 lOMoARcPSD|1670110
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?
An unearned compensation liability in the amount of $1 million is created at
the grant date
An unearned compensation asset in the amount of $1 million is created at
, the grant date
Stockholders' equity increases by $1 million at the grant date
An unearned compensation contra equity account in the amount of $500,000
is recognized at the grant date
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?
Stockholders' equity increases by $1,000,000 at the grant date
Stockholders' equity increases by $500,000 at the grant date
Stockholders' equity increases by $250,000 at the grant date
lOMoARcPSD|1670110
Stockholders' equity decreases by $250,000 at the end of year 1
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).
Operating income decreased by $1.0 million. Cash flows decreased by $4.0
million.
Operating income decreased by $5.0 million. Cash flows increased by $6.0
million.
Operating income decreased by $4.0 million. Cash flows decreased by $4.0
million.
Operating income decreased by $6.0 million. Cash flows decreased by $1.0
million.
Operating income decreased by $6.0 million. Cash flows decreased by $3.0
million.
Your answer is correct.
lOMoARcPSD|1670110
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.
$5.4 million
$6.0 million
$6.8 million
$7.2 million
$7.8 million
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