Question

The future value of an ordinary annuity is higher if the discount rate is higher.

True

False

The statement of shareholders' equity reports the effects from the recognition or valuation of certain asset or liability transactions that change Accumulated Other Comprehensive Income.

True

False

Equity of a wholly-owned company is comprised only of contributed capital and earned capital.

True

False

Answer 1

1. True

The future value of an annuity is the value of a group of recurring payments at a specified date in the future; these regularly recurring payments are known as an annuity. The future value of an annuity measures how much you would have in the future given a specified rate of return or discount rate. The future cash flows of the annuity grow at the stated discount rate, so a higher discount rate results in a higher future value for the annuity.

2. True

An additional component of stockholders’ equity is “accumulated other comprehensive income“. Accumulated other comprehensive income includes gains and losses related to certain events that have historically bypassed the income statement for income smoothing reasons. Therefore, for many years, the only reported measure of a company’s performance was net income.

A recent change in financial reporting now requires companies to report a more complete measure of income called “comprehensive income“. In essence, comprehensive income includes not just net income but other comprehensive income. As increases and decreases in other comprehensive income occur during the reporting period, these are reported in the statement of change in stockholders’ equity or in a separate statement of comprehensive income. But any accumulated balance of these unrealized gains and losses is reported under stockholders’ equity in the balance sheet.

These items normally include unrealized gains and losses on available for sale securities, translation gains and losses on foreign currency, and excess of additional pension liability over unrecognized prior service cost.

3. True

As the company is wholly owned the debt content of capital invested is also zero, so

Capital contribution = Common Stock + Preferred Stock + Earned Capital

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