Wall Street Prep The Premium Package
Review: Accounting & Financial Statement
Analysis Exam.
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
- 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.
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?
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
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.
Only the $4.0 million in depreciation expense impacts operating income. Capital
expenditures are not recognized on the income statement. Affiliate income and