QUESTION: 1881

Firms X and Y, similar in all respects, recently bought identical securities. However, X has classified the securities as "held-to-maturity" securities while Y has categorized them as "available-for-sale" securities. Which of the following statements is/are true as a result of this difference?

X and Y will show same assets on their balance sheets over time.
II. X will have a higher income volatility than Y.
III. X and Y will show different total equity values.
I & II
I & III
I, II & III
III only

Answer(s): D

Explanation:

"Available-for-sale" securities are reported at their fair market value on the balance sheet while "held- to- maturity" securities are carried at amortized historical cost. Therefore, the reported assets for X and Y will be different over time. Hence, they will also show different equities because liabilities for the two firms are the same. However, changes in the market value of available-for-sale securities are charged directly to the retained earnings account, without going through the income statement. On the other hand, changes in the market value of "held-to-maturity" securities are not even recognized on financial statements due to historical cost accounting. For both the classifications, interest and dividend payments are attributed to the income. So the income volatility is not affected due to the classification.

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QUESTION: 1882

The basic asset-liability equation, assets = liabilities + shareholder equity implies:

operating activities = financing activities
investing activities = financing activities
investing activities = operating activities
none of these answers

Answer(s): B

Explanation:

The asset-liability equation has the results of investing activities on the left-hand side as assets. On the right hand side are results of creditor financing (debt) and equity financing.

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QUESTION: 1883

Under GAAP, when interest rates rise, the carrying value of a long-term bond ________.

remains unchanged
increases
depends on the characteristics of the bond
decreases

Answer(s): A

Explanation:

Long-term debt is recorded at acquisition cost and historical cost accounting does not allow revaluation. Hence, even though the market value of the debt changes due to a change in interest rates, the book value of the debt changes only at the regular amortization schedule, independent of the market changes.

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QUESTION: 1884

The following is true about liquidating dividends:

all of these answers
these dividends return part of the original investment to the stockholders
the cash dividend account is closed to retained earnings
they only occur when the company is making a major acquisition

Answer(s): B

Explanation:

The cash dividend account is not affected, and they would not likely occur when making an acquisition.

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QUESTION: 1881

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QUESTION: 1882

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QUESTION: 1883

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QUESTION: 1884

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