Deck 5: The Income Statement and the Statement of Cash Flows

Question 1

In an accrual-based transactional approach, net income is typically defined as

A)Revenues - Expenses + Gains + Losses
B)Revenues - Expenses
C)Revenues - Expenses + Gains - Losses
D)increase in net assets from nonowner transactions

Answer 1

C

Question 2

Which of the following best describes the characteristics that relate to the income statement?

A)The income statement can alternatively be referred to as a statement of financial position.
B)The income statement is the most important financial statement in the annual report.
C)The income statement serves as a link between the statement of retained earnings and the balance sheet.
D)The income statement summarizes the results of a company's cash operations for the accounting period.

Answer 2

C

Question 3

What income measurement approach is identified by the following equation? Net income = Net assets at the end of the year - Net assets at the beginning of the year - Additional investment by owners + Distributions to owners

A)transactional
B)cash flow
C)historical cost
D)capital maintenance

Answer 3

D

Question 4

In general, revenue is recognized as being earned

A)during the production process
B)at the completion of the production process
C)at the time cash is received
D)at the time goods are sold or services are rendered

Question 5

Which statement best defines income concepts?

A)Revenues and expenses are more consistent with the capital maintenance concept to income measurement than with the transactional approach.
B)The capital maintenance approach to income measurement relies on historical cost.
C)The capital maintenance approach to income measurement is the approach used in accounting today.
D)The transactional approach to income measurement is applied using the accrual basis of accounting.

Question 6

Comprehensive income includes the following changes in equity in a company during a period except

A)transactions with nonowners
B)events relating to nonowner sources
C)circumstances relating to nonowner sources
D)distributions to owners

Question 7

One method of revenue recognition that postpones the recognition until after the time of sale is

A)percentage-of-completion
B)proportional performance
C)cost recovery
D)point of sale

Question 8

In 2007, the CFA Institute Centre for Financial Market Integrity proposed a new financial model to replace the traditional earnings number.Which of the following characteristics does the proposed statement of changes in net assets available to stockholders exclude?

A)It recognizes all transactions and events that change net assets.
B)Line items would be reported by the nature of the item.
C)Line items would be reported by the function for which the resource is consumed.
D)It includes the effects of all investing and financing activities.

Question 9

Operating capability refers to

A)the ability of a company to adapt to unexpected needs and opportunities
B)the uncertainty or unpredictability of the future results of a company
C)a measure of overall company performance
D)a company's ability to maintain a given level of operations

Question 10

The comparison of the beginning and ending capital (net assets)after adjusting for any additional investments or disinvestment during the period, and indicating the difference to be corporate income, is termed the

A)financial capital maintenance concept
B)physical capital maintenance concept
C)transactional approach
D)asset valuation approach

Question 11

Which of the following items would be excluded from "core activities" as defined by the AICPA?

A)recurring nonoperating gains
B)financing costs
C)sales revenue
D)sales commissions

Question 12

Comprehensive income would include which of the following? $\begin{array}{ll}&\text { Net Income }&\text { Distributions to Owners }\\I.&\text { No } & \text { No } \\II.&\text { No } & \text { Yes } \\III.&\text { Yes } & \text { No } \\IV.&\text { Yes } & \text { Yee }\end{array}$

A)I
B)II
C)III
D)IV

Question 13

Characteristics of risk as they relate to the uncertainty or unpredictability of the future results of a company include

A)the greater the risk, the higher the rate of return expected by investors
B)risk increases as the range and timeframe within which future results are likely to fall increases
C)risk increases as the range and timeframe within which future results are likely to fall decreases
D)the greater the risk, the higher the rate of return expected by creditors

Question 14

Which of the following statements best defines the transactional approach?

A)The transactional approach is justified by the qualitative characteristic of relevance.
B)The transactional approach is conceptually identical to the capital maintenance concept.
C)Under the transactional approach, assets and liabilities are generally valued at the historical cost.
D)The transactional approach follows the accrual basis of accounting.

Question 15

The income statement is an important financial statement for all of the following reasons, except

A)the income statement supports the stewardship function by helping stockholders evaluate management's operating effectiveness
B)past income statements can be useful indicators in predicting current and future cash dividend payments as well as future stock prices
C)the income statement provides useful information concerning the corporation's ability to generate sufficient cash flows from operations for use in payment of its operating obligations
D)the income statement reports to users the amount of net cash inflows resulting from operating, financing, and investing activities

Question 16

Garcia Company began 2010 with net assets of $80, 000.Net income calculated by using the capital maintenance concept was $21, 000.During 2010 owners contributed $26, 000 of new capital.By year-end, the net assets totaled $78, 000.Dividends to the owners during 2010 were

A)$49, 000
B)$28, 000
C)$23, 000
D)$ 2, 000

Question 17

When net assets are recorded at their historical cost and changes in net assets are not recorded unless an event, transaction, or circumstance occurs, the

A)financial capital maintenance approach is being used
B)transactional approach is being used
C)physical capital maintenance approach is being used
D)comprehensive income approach is being used

Question 18

Financial flexibility is generally defined as

A)the ability of a company to adapt to unexpected needs and opportunities
B)the uncertainty or unpredictability of the future results of a company
C)a measure of overall company performance
D)a company's ability to maintain a given level of operations

Question 19

On December 31, 2010, the net assets of Marino Manufacturing amounted to $40, 000.Net income calculated by using the financial capital maintenance concept amounted to $12, 000.During the year, additional common stock was issued for $8, 000, and $5, 000 of dividends were paid.The net assets at January 1, 2010, amounted to

A)$31, 000
B)$37, 000
C)$20, 000
D)$25, 000

Question 20

Which of the following is not an expense recognition approach recognized by the FASB as an expense recognition principle to properly match expenses against revenues?

A)immediate recognition
B)systematic and rational allocation
C)cash payment
D)association of cause and effect

Question 21

Realization of revenue occurs when

A)the item is formally recorded and reported in the financial statements
B)noncash resources are converted into cash or rights to cash
C)the actual exchange of noncash resources into cash
D)when a transaction is both realized and realizable

Question 22

Which of the following expenses is an example of expense recognition under the immediate recognition principle?

A)sales commissions
B)depreciation
C)management salaries
D)transportation out

Question 23

From the following information, compute cost of goods sold. $\begin{array}{ll}\text { Purchase returns } & \$ 200 \\\text { Inventory, December } 31 & 1,500 \\\text { Freight-in } & 100 \\\text { Inventory, January } 1 & 1,800 \\\text { Purchases } & 5,000\end{array}$

A)$5, 300
B)$5, 200
C)$5, 100
D)$5, 000

Question 24

Which of the following is not a limitation of the income statement?

A)Comparability between companies may suffer because companies don't have enough leeway to choose between accounting methods.
B)The use of different formats by companies within the same industry may hide differences in operating results.
C)The use of functional classifications, instead of activity classifications, for operating expenses may not provide sufficient information for predicting future cash outflows.
D)The matching of allocated historical costs against current revenues may not provide an accurate measure of a return on capital.

Question 25

Intraperiod tax allocation

A)is used to allocate a company's total income tax expense to the components of net income, comprehensive income, and retained earnings
B)involves temporary (timing)differences between financial and taxable incomes
C)requires allocation of deferred taxes across accounting periods
D)results from differences between tax regulations and the principles followed to determine financial income

Question 26

A company that discontinues and disposes of an operation (component)should include the gain or loss on sale in the income statement as a(n)

A)prior-period adjustment
B)extraordinary item
C)amount after income from continuing operations and before extraordinary items
D)bulk sale of fixed assets included in income from continuing operations

Question 27

All of the information required in the computation of cost of goods sold is presented below, except for purchases, which must be what amount? $\begin{array}{lc}\text { Purchase discounts } & \$ 200 \\\text { Inventory, December } 31 & 1,500 \\\text { Cost of goods sold } & 9,500 \\\text { Purchases } & ? \\\text { Inventory, January 1 } & 1,500 \\\text { Freight-in } & 500\end{array}$

A)$ 9, 800
B)$10, 200
C)$ 8, 700
D)$ 9, 200

Question 28

In 2010, the Damon Company had sales of $600, 000; cost of sales of $430, 000; interest expense of $12, 000; a gain on the sale of a component of $12, 000; and an extraordinary loss of $20, 000.For its income statement, Damon uses the single-step format and the all-inclusive concept.What was Damon's reported pretax income from continuing operations?

A)$150, 000
B)$170, 000
C)$158, 000
D)$138, 000

Question 29

The major components of the income statement are listed below: A = extraordinary items
B = income from continuing operations
C = earnings per share
D = results from discontinued operations
In what sequence do they normally appear on the income statement?

A)B-A-D-C
B)B-A-C-D
C)B-D-A-C
D)B-D-C-D

Question 30

Which of the following is a required disclosure in the income statement when reporting the sale of a component of the business?

A)The gain or loss on sale should be reported as an extraordinary item.
B)Results of operations of a discontinued component should be disclosed immediately below extraordinary items.
C)Earnings per share from both income from continuing operations and net income should be disclosed on the face of the income statement.
D)Revenue and expenses applicable to the discontinued operations should be disclosed in the income statement.

Question 31

The Gordon Company is disposing of a component of its company.The net loss from the sale is estimated to be $500, 000.Included in the $500, 000 is termination pay of $100, 000, which is directly associated with the decision to dispose of the component; and net losses from component asset write-downs of $400, 000.Ignoring taxes, Gordon's income statement should report a loss on sale of a business component of

A)$100, 000
B)$600, 000
C)$400, 000
D)$500, 000

Question 32

In distinguishing between revenues and gains, which of the following statements is not true?

A)More gains than revenues are beyond the entity's control.
B)Gains are associated more with peripheral, nonoperating activities than are revenues.
C)GAAP does not provide precise distinctions between revenues and gains.
D)Revenues are reported net (rather than gross)more often than gains.

Question 33

All of the following are included in the computation of cost of goods sold except

A)freight-out
B)purchase returns and allowances
C)beginning finished goods inventory
D)freight-in

Question 34

To be recognized as revenue, an item must

A)meet the definition of earned revenue
B)be earned revenue and be realized or realizable
C)be realized
D)be earned

Question 35

A revenue recognition method that recognizes revenue before the time of sale is

A)percentage-of-completion
B)installment
C)cost recovery
D)point of sale

Question 36

The following information is available for the Brown Company for 2010: $\begin{array}{ll}\text { Grosssprofit } & \$ 30,000 \\\text { Net sales } & 500,000 \\\text { Beginning inventory } & 220,000 \\\text { Ending inventory } & 40,000\end{array}$ What was the amount of net purchases?

A)$290, 000
B)$210, 000
C)$180, 000
D)$150, 000

Question 37

Intraperiod tax allocation requires a corporation's total income tax expense to be allocated to all of the following except

A)extraordinary items
B)other revenues and expenses
C)discontinued operations
D)prior-period adjustments

Question 38

Depreciation is an example of which expense recognition principle?

A)association of cause and effect
B)systematic and rational allocation
C)cost recovery
D)immediate recognition

Question 39

The gross profit of Abel Company for 2010 is $300, 000, cost of goods manufactured is $400, 000, the beginning inventories of goods in process and finished goods are $28, 000 and $35, 000, respectively, and the ending inventories of goods in process and finished goods are $50, 000 and $70, 000, respectively.The cost of goods sold of Abel Company for 2010 must have been

A)$378, 000
B)$265, 000
C)$278, 000
D)$365, 000

Question 40

Examples of matching expenses against revenues using the association of cause and effect include all of the following except

A)insurance costs
B)transportation costs for delivery of goods to customers
C)costs of products sold
D)sales commissions

Question 41

Which of the following items would not be reported on a net-of-tax basis in an entity's financial statements?

A)a revision in the remaining useful life of depreciable equipment, which is accounted for as a change in accounting estimate
B)a gain arising from the sale of a component of the business
C)an adjustment to the financial statements that is accounted for as a prior-period adjustment
D)a loss that qualifies as an extraordinary item

Question 42

Which of the following statements regarding limitations of the income statement is not true?

A)The net income amount includes estimated expenses that are subject to change.
B)Numerous available accounting methods may cause a lack of comparability.
C)Rigid accounting rules may lead to distorted earnings amounts.
D)The current income statement allows several income items to be directly put on the retained earnings statement.

Question 43

How should a material, infrequent event not meeting the criteria for an extraordinary item be disclosed in the income statement?

A)shown as a separate item in income from continuing operations and supplemented by a footnote if deemed appropriate
B)shown in income from continuing operations but not shown as a separate item
C)shown after income from continuing operations but before extraordinary items
D)shown after extraordinary items net of income tax but before net income

Question 44

Exhibit 5-1 The following condensed income statement of Rahm Corporation is presented for the two years ended December 31, 2010 and 2009:
$\begin{array}{lll}&2010&2009\\\text { Net sales } & \$ 10,000,000 & \$ 9,000,000 \\\text { Cost of sales } & \underline{6,000,000} & \underline{6,000,000} \\\text { Grossprofit } & \$ 4,000,000 & \$ 3,000,000\\\text { Operating expense } &2,500,000&2,000,000\\\text { Operating income } & \$ 1,500,000 & \$ 1,000,000 \\\text { Gain on sale of a component } & 900,000 & --\\&\$2,400.000&\$1,000.000\\\text { Income tax expense}&720,000&300,000\\\text { Net income}&\$1,680,000&\$700,000\end{array}$ On January 1, 2010, Rahm entered into an agreement to sell for $2, 000, 000 one of its separate operating divisions.The sale resulted in a gain on disposition of $900, 000 on November 12, 2010, and qualifies as a discontinued component.This division's contribution to Rahm's reported income before income taxes for each year was as follows:
$\begin{array}{ll}2010 & \$ 700,000 \text { loss } \\2009 & \$ 400,000 \text { loss }\end{array}$
Assume an income tax rate of 30%.

-
Refer to Exhibit 5-1.In the preparation of a revised comparative income statement, Rahm should report income from continuing operations after income taxes for 2010 and 2009, respectively, amounting to

A)$1, 540, 000 and $700, 000
B)$1, 540, 000 and $980, 000
C)$1, 680, 000 and $700, 000
D)$1, 680, 000 and $980, 000

Question 45

The subtotal, gross profit, will be disclosed on

A)a multiple-step income statement
B)both multiple-step and single-step income statements
C)neither multiple-step nor single-step income statements
D)a single-step income statement

Question 46

The Nikel Company sold its cattle ranching component on June 30, 2010, for a gain of $1, 000, 000.From January through June, the component had sustained operating income of $300, 000.The income tax rate is 30%.How should Nikel report the income and the sale on its income statement?

A)as $300, 000 operating income and a $1, 000, 000 gain on sale of component
B)as a $1, 300, 000 gain in operating income
C)as a net of tax gain of $910, 000 after income from continuing operations
D)as $210, 000 operating income and a $700, 000 gain on sale of the component shown before extraordinary items

Question 47

When an entity reports on a sale of a component of the business

A)any income or loss from operations of the component should be reported in the income from continuing operations section, but any gain or loss on the sale of the component should be presented below the income from continuing operations section
B)current operating income or loss of the component and any gain or loss on sale of the component should be presented in a separate section of the income statement
C)any gain or loss on the sale should always be presented in the extraordinary gain or loss section of the income statement
D)all information related to the sold component should be reported solely in the footnotes accompanying the financial statements

Question 48

Which of the following statements concerning the sale of a business component is true?

A)When the sale date for the component is after the current year end, depreciation expense for the component's assets is included in the discontinued operations section of the income statement.
B)The results of discontinued operations should be reported on the income statement after extraordinary items but before cumulative effect of a change in accounting principle.
C)The taxed effect of component-disposition gains or losses need not be disclosed on the face of the income statement.
D)The Financial Accounting Standards Board concluded that component-disposition gains or losses should be classified as extraordinary items.

Question 49

When a change in accounting principle occurs, the balance of the related asset or liability account is recalculated

A)at the end of the current period
B)when the decision is made to change
C)at the beginning of the current period only
D)at the beginning of the first period affected and reported in the financial statements

Question 50

The Riverside Company operates a manufacturing plant overlooking the Snake River.In early 2010, a tornado destroyed the uninsured plant, resulting in $400, 000 damage.Such damage had occurred previously only once in the last 110 years.Riverside's $400, 000 loss should be reported on the income statement

A)after ordinary income, but before extraordinary items
B)as an extraordinary item
C)as an adjustment to net income
D)as a separate component of income from continuing operations

Question 51

Which of the following is not required to be disclosed, pursuant to GAAP?

A)Operating income or loss from discontinued component reported on the income statement
B)A description of facts and circumstances leading up to the sale of a discontinued component within the notes of the financial statements
C)All gains or losses from sale of the component reported on the income statement or in the footnotes
D)The book values of major component assets and liabilities reported on the balance sheet or in the footnotes
E)All of these must be disclosed according to GAAP.

Question 52

Which is least likely to be classified as a sale of a component?

A)sale by a communications company of its radio stations, but none of its television stations
B)sale by a food distributor of its wholesale supermarket division while maintaining its wholesale fast-food restaurants division
C)sale by an apparel manufacturer of a woolen suit manufacturing plant in order to concentrate on the manufacture of suits from synthetic products
D)sale by a meat-packing company of its (entire)20% interest in a professional football team

Question 53

Under which of the following conditions would frost damage be considered an extraordinary item for income reporting purposes?

A)only if frosts in the geographical area are unusual in nature and occur infrequently
B)only if frosts are normal in the geographical area but do not occur frequently
C)only if frosts occur frequently in the geographical area but can be covered by insurance policies
D)under any circumstances frost damage should be classified as an extraordinary item

Question 54

Earnings per share is an important disclosure because

A)it provides information relevant to the common stockholders
B)net income disclosed in the financial statements can fluctuate based upon management's intentions
C)it forces common and preferred stockholders to read the financial statements
D)it uses net income

Question 55

How should the gain or loss that is considered infrequent but not unusual in nature be disclosed?

A)separately in the income statement immediately after income from continuing operations
B)on a net-of-tax basis in the income statement immediately after income from continuing operations
C)as an extraordinary item
D)separately in the income statement as a component of income from continuing operations

Question 56

In 2010, the Sykes Company wrote off a $100, 000 debt from a major customer, lost $1, 250, 000 when a foreign country devalued its currency, gained $2, 000, 000 when a manufacturing plant was destroyed by a flood, lost $500, 000 on the early retirement of its long-term bonds, and lost $75, 000 on the sale of stock from its investment portfolio.What amount of extraordinary items (before income taxes)will Sykes report in 2010?

A)$ 250, 000
B)$ 175, 000
C)$2, 000, 000
D)$1, 425, 000

Question 57

Which of the following material gains/losses would be disclosed as an extraordinary item on an entity's income statement?

A)a loss arising from the write-off of a large uncollectible accounts receivable balance
B)a loss arising from the expropriation of a manufacturing plant by a foreign government
C)a gain from sale of a component of the entity's business
D)a gain from the sale of manufacturing equipment no longer needed by the entity

Question 58

A review of the December 31, 2010, financial statements of Rule Corporation revealed that under the caption "extraordinary losses, " Rule had reported a total of $300, 000.Further analysis revealed that the $300, 000 in losses comprised the following items: 1.Rule recorded a gain of $\$ 80,000$ incurred in the sale of equipment.
2.In an umusual and infrequent occurrence, a loss of $\$ 250,000$ was sustained as a result of tomado damage to a manufacturing facility
3. During 2010, several factorieswere shut down chuing a najor strike by employees of Rule's major customer. Shut clown expenses totaled $\$ 100,000$ .
4. Inventory in the amount of $\$ 30,000$ waswritten off as obsolete. Ignoring income taxes, what amount of loss should Rule report as an extraordinary loss on its 2010 income statement?

A)$100, 000
B)$250, 000
C)$280, 000
D)$350, 000

Question 59

To be considered an extraordinary item, an event must be

A)unusual
B)unusual or infrequent
C)infrequent
D)infrequent and unusual

Question 60

Exhibit 5-1 The following condensed income statement of Rahm Corporation is presented for the two years ended December 31, 2010 and 2009:
$\begin{array}{lll}&2010&2009\\\text { Net sales } & \$ 10,000,000 & \$ 9,000,000 \\\text { Cost of sales } & \underline{6,000,000} & \underline{6,000,000} \\\text { Grossprofit } & \$ 4,000,000 & \$ 3,000,000\\\text { Operating expense } &2,500,000&2,000,000\\\text { Operating income } & \$ 1,500,000 & \$ 1,000,000 \\\text { Gain on sale of a component } & 900,000 & --\\&\$2,400.000&\$1,000.000\\\text { Income tax expense}&720,000&300,000\\\text { Net income}&\$1,680,000&\$700,000\end{array}$
On January 1, 2010, Rahm entered into an agreement to sell for $2, 000, 000 one of its separate operating divisions.The sale resulted in a gain on disposition of $900, 000 on November 12, 2010, and qualifies as a discontinued component.This division's contribution to Rahm's reported income before income taxes for each year was as follows:
$\begin{array}{ll}2010 & \$ 700,000 \text { loss } \\2009 & \$ 400,000 \text { loss }\end{array}$
Assume an income tax rate of 30%.

-
Refer to Exhibit 5-1.In the preparation of a revised comparative income statement, Rahm should report under the caption "Discontinued Operations" for 2010 and 2009, respectively,

A)income of $140, 000 and a loss of $280, 000
B)income of $140, 000 and a loss of $0
C)income of $200, 000 and a loss of $400, 000
D)a loss of $700, 000 and a loss of $400, 000

Question 61

Which will never result in an adjustment of a prior period's financial statements?

A)a material error
B)a change in accounting principle
C)a change in the estimated life of a depreciable asset
D)the realization of income tax benefits of preacquisition operating loss carryforward of a purchased subsidiary

Question 62

Reporting "changes in accounting principles" is important because

A)FASB has declared a new GAAP
B)consistent application improves intracompany comparability
C)the use of FIFO inventory reporting by all companies must be properly disclosed
D)readers of financial statements must know of changes in accounting techniques

Question 63

The information content of a statement of retained earnings would be increased if

A)all prior-period adjustments were disallowed by a statement of the Financial Accounting Standards Board
B)the statement were prepared as a supporting schedule that is attached to the bottom of the entity's income statement
C)the entity's income statement were prepared according to the all-inclusive concept
D)the entity's income statement were prepared according to the current-operating-performance concept

Question 64

Other comprehensive income items may be reported at their: $\begin{array}{lll}& \text { Gross Amounts}& \text { Net of Tax Amounts}\\\text { I. } & \text { Yes } & \text { Yes } \\\text { II. } & \text { No } & \text { No } \\\text { III. } & \text { Yes } & \text { No } \\\text { IV } & \text { No } & \text { Yes }\end{array}$

A)I
B)II
C)III
D)IV

Question 65

Which of the following is not an acceptable way of reporting a company's comprehensive income?

A)on the face of the income statement
B)in a separate statement of comprehensive income
C)in the statement of changes in stockholders' equity
D)in the statement of retained earnings

Question 66

In preparing a statement of retained earnings, a company needs to know its

A)prior-period adjustments, net income (loss), and dividends
B)comprehensive income and prior-period adjustments
C)comprehensive income, dividends, and prior-period adjustments
D)dividends and prior-period adjustments

Question 67

Which of the following events would be accounted for as a prior-period adjustment?

A)change in the depreciable lives of plant assets
B)an overstatement of depreciation expense in a prior year
C)change in the method of computing depreciation of plant assets
D)change in inventory cost flow assumption from first-in, first-out to last-in, first-out

Question 68

For an event or transaction to be classified as an extraordinary item in the income statement, it should be

A)infrequent and material, but it need not be unusual in nature
B)unusual in nature and material, but it need not be infrequent
C)unusual in nature, infrequent, and material
D)unusual in nature and infrequent, but it need not be material

Question 69

The following information relates to the Smith Company: $\begin{array}{ll}2010 \text { cash dividend declared } & \$ 400 \\\text { Unadjusted (reported) retained eamings, January 1, 2010 } & ? \\2010 \text { net income } & 480 \\\text { Error in 2009-Understatement of ending inventory, } \\\text { error found in 2010 } & 150\\\text { Unadjusted (reported) retained earnings, December 31, } 2010& 1,400\end{array}$ What is the unadjusted January 1, 2010, balance in retained earnings?

A)$1, 170
B)$1, 320
C)$1, 470
D)$1, 630

Question 70

A company is justified in changing from one generally accepted accounting principle to another generally accepted accounting principle only if

A)the change decreases the entity's reported net income
B)the change both improves the financial statement presentation and increases the entity's reported net income
C)the change produces more informative financial statements
D)approval is first obtained from the Financial Accounting Standards Board

Question 71

Comprehensive income consists of

A)operating income + other income and losses
B)net income + other adjustments to retained earnings
C)net income + other comprehensive income
D)other comprehensive income + unrealized changes in the value of available for sale securities

Question 72

A company is required to report earnings per share on $\begin{array}{lll}& \text {Net Income}& \text {Comprehensive Income}\\\text { I. } & \text { Yes } & \text { Yes } \\\text { II. } & \text { No } & \text { No } \\\text { III. } & \text { Yes } & \text { No } \\\text { IV } & \text { No } & \text { Yes }\end{array}$

A)I
B)II
C)III
D)IV

Question 73

The statement of cash flows is least likely to help external users to assess

A)a company's ability to generate positive future cash flows
B)the amount of a company's future accrual-based sales revenue
C)a company's ability to meet its obligations and pay dividends
D)a company's need for external financing

Question 74

The following information relates to the Smith Company: $\begin{array}{ll}2010 \text { cash dividend declared } & \$ 400 \\\text { Restated (adjusted) retained earnings, January 1, 2010 } & ? \\2010 \text { net income } & 480 \\\text { Error in 2009-Underst at ement of ending inventory, } \\\text { error found in 2010 } & 150\\\text { Restated (adiusted) retained earnings, December 31, } 2010& 1,550\end{array}$ What is the adjusted January 1, 2010, balance in retained earnings?

A)$1, 170
B)$1, 320
C)$1, 470
D)$1, 630

Question 75

Comprehensive income is an important concept in accounting because it represents

A)all changes in equity
B)changes in equity from nonowner sources
C)changes in liabilities minus assets
D)the impact on equity of all transactions

Question 76

Which of the following is not part of other comprehensive income?

A)unrealized changes in the value of trading securities
B)certain pension plan gains, losses, and prior service cost adjustments
C)certain gains/losses in derivatives
D)currency translation adjustments

Question 77

Normally, a material effect from changing accounting principles should be reported

A)as an extraordinary item
B)as a retrospective adjustment
C)by including the cumulative effect of the change as a separate line item in current income from continuing operations
D)by including the cumulative effect of the change on prior periods' earnings as a component of net income in the period of the change

Question 78

Which of the following sections will not appear in the statement of cash flows?

A)operating activities
B)investing activities
C)financing activities
D)selling activities

Question 79

Which of the following is not a source of a prior-period adjustment?

A)a mathematical mistake
B)the incorrect use of existing facts
C)misuse of a generally accepted accounting principle
D)a change from using one GAAP estimate to another GAAP estimate

Question 80

When is a company not required to report comprehensive income?

A)when it has a net operating loss
B)when it has no other comprehensive income items
C)when it has no extraordinary items
D)when it has no prior-period adjustments