Deck 6: Financial Statement I: the Income Statement

Question 1

A measure of a company's profitability is the

A) Current ratio
B) Current cash debt coverage ratio
C) Return on assets ratio
D) Debt to total assets ratio

Answer 1

C

Question 2

Which of the following is not an accounting change?

A) Change in accounting principle
B) Change in accounting estimate
C) Change in a reporting entity
D) Change because of an error

Answer 2

D

Question 3

The disposal of a significant component of a business is called

A) A change in accounting principle
B) A special item of income from continuing operations item
C) An other expense
D) Discontinued operation

Answer 3

D

Question 4

Which of the following is not an economic consequence of financial reporting?

A) Financial information can affect the distribution of wealth among investors. More informed investors, or investors employing security analysts, may be able to increase their wealth at the expense of less informed investors.
B) Financial information can affect the level of risk accepted by a firm. Focusing on short-term, less risky projects may have long-term detrimental effects.
C) Financial information can affect the rate of capital formation in the economy and result in a reallocation of wealth between consumption and investment within the economy.
D) Financial information can affect the allocation of psychic income among investors.

Question 5

A transaction that is material in amount, unusual in nature, but not infrequent in occurrence should be presented separately as a (an)

A) Component of income from continuing operations, but not net of applicable income taxes
B) Component of income from continuing operations, net of applicable income taxes
C) Extraordinary item, net of applicable income taxes
D) Prior period adjustment, but not net of applicable income taxes

Question 6

An example of the correction of an error in previously issued financial statements is a change

A) From the completed contract to the percentage-of-completion method of accounting for long-term construction-type contracts.
B) In the depletion rate, based on new engineering studies of recoverable mineral resources.
C) From the sum-of-years-digits to the straight-line method of depreciation for all plant assets.
D) From the installment basis of recording sales to the accrual basis, when collection of the sales price has been and continues to be reasonably assured

Question 7

The statement, net income should reflect all items that affected the net increase or decrease in stockholders' equity during the period is consistent with which of the following concepts of income?

A) Economic
B) All inclusive
C) Current operating performance
D) Money

Question 8

Which of the following is characteristic of a change in an accounting estimate?

A) It usually need not be disclosed
B) It does not affect the financial statements of prior periods
C) It should be reported through the restatement of the financial statements
D) It makes necessary the reporting of pro forma amounts for prior periods

Question 9

A change in the method of inventory pricing from FIFO to LIFO would be accounted for as a (an):

A) Part of discontinued operations
B) Part of gross profit
C) Change in accounting principle
D) Change in estimate.

Question 10

A company changed its method of inventory pricing from last-in, first-out to first-in, first-out during the current year. Generally accepting accounting principles require that this change in accounting method be reported by:

A) Accounting for the effects of the change in the current and future periods.
B) Showing the cumulative effect of the change in the current year's financial statements and pro forma effects on prior year's financial statements in an appropriate footnote
C) Disclosing the reason for the change in the "significant accounting policies" footnote for the current year but not restating prior year financial statements
D) Applying retroactively the new method in restatements of prior years and appropriate footnote disclosures

Question 11

Which of the following is not an example of an error?

A) A change from an accounting practice that is not generally acceptable to a practice that is generally acceptable.
B) Mathematical mistakes.
C) A change from LIFO to FIFO inventory costing
D) The incorrect classification of costs and expense

Question 12

Which of the following is not an income statement element?

A) Asset
B) Gain
C) Revenue
D) Expense

Question 13

A prior period adjustment is reported as:

A) An unusual item in the income statement
B) An addition to (or deduction from) net income in the income statement
C) An addition to (or a deduction from) the beginning balance of retained earnings
D) An addition to (or deduction from) the ending balance of retained earnings

Question 14

Which of the following is not reported as an accounting error (prior period adjustment)?

A) Change in the method of inventory pricing form FIFO to average-cost.
B) Mathematical mistakes.
C) Mistakes in the application of accounting principles.
D) Oversight or misuse of facts that existed at the time financial statements were prepared.

Question 15

The formula, Operating profit/Sales, is used to calculate

A) Gross profit percentage
B) Net profit percentage
C) Comprehensive income percentage
D) Operating profit percentage

Question 16

If year one sales equal $800,000, year two equal $840,000 and year three equals $896,000 the percentage to be assigned for year two in a sales trend analysis, assuming that year 1 is the base year, is

A) 100%
B) 89%
C) 105%
D) 112%

Question 17

Which of the following occur from peripheral or incidental transactions?

A) Sales revenue
B) Cost of goods sold
C) Gain on the sale of equipment
D) Operating expenses

Question 18

The correction of an error in the financial statements of a prior period should be reflected, net of applicable income taxes, in the current

A) Income statement after income from continuing operations
B) Income statement before income from continuing operations
C) Retained earnings statement as an adjustment of the opening balance
D) Retained earnings statement after net income but before dividends

Question 19

Which of the following is the definition of an expense?

A) Outflows or other using-up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations.
B) Inflows or other enhancements of assets of an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations.
C) Decreases in equity (net assets) from peripheral or incidental transactions of an entity except those that result from expenses or distributions to owners.
D) Increases in equity (net assets) from peripheral or incidental transactions of an entity except those that result from revenues or investments by owners.

Question 20

Which of the following items would be reported net of tax on the face of the income statement?

A) Discontinued operations
B) Unusual gain
C) Change in collectability of receivables
D) Prior period adjustment

Question 21

Which of the following is not an acceptable way of displaying the components of other comprehensive income?

A) Combined statement of retained earnings.
B) One statement approach.
C) Two statement approach.
D) One or Two statement approach

Question 22

Discuss the four income statements elements defined by SFAC No. 6.

Question 23

A change in the salvage value of an asset depreciated on a straight-line basis and arising because additional information has been obtained is

A) An accounting change that should be reported in the period of change and future periods of change if the change affects both
B) An accounting change that should be reported by restating the financial statements of all prior periods presented
C) A correction of an error
D) Not an accounting change

Question 24

Discuss the evolution of the accounting treatment of extraordinary items.

Question 25

What are accounting changes and why is it an issue. List and define the three types of accounting changes.

Question 26

Discuss the concept of simple vs. complex capital structures and how it relates to the reporting of earnings per share.

Question 27

Gains and losses that bypass net income but affect stockholders' equity are referred to as:

A) Comprehensive income
B) Other comprehensive income
C) Prior period income
D) Unusual gains and losses

Question 28

Bowler Company reports net income of $700,000. It declares and pays dividends of $100,000 for the year, one-half of which relate to the preferred shares. The weighted-average number of common shares outstanding during the year is 200,000 shares, and the weighted-average number of preferred shares outstanding during the year is 10,000 shares. Earnings per share for Bowler Company is (round your answer to the nearest cent):

A) $3.18
B) $3.25
C) $3.30
D) $2.95.

Question 29

What is the purpose of reporting comprehensive income?

A) To provide information for each segment of the business.
B) To provide a consolidation of the income of the firm's segments.
C) To summarize all changes in equity from nonowner sources.
D) To reconcile the difference between net income and cash flows provided from operating activities.

Question 30

Define and discuss the accounting treatment for prior period adjustments.
a. Correction of an error in the financial statements of a prior period.
b. Adjustments that result from the realization of income tax benefits of preacquisition operating loss carry-forwards of purchased subsidiaries.

Question 31

A change in accounting principle requires that the cumulative effect of the change for prior periods be shown as an adjustment to:

A) Beginning retained earnings of the earliest period presented
B) Comprehensive income for the earliest period presented
C) Stockholders' equity of the period in which the change occurred
D) Net income of the period in which the change occurred

Question 32

Earnings per share is computed as net income:

A) Minus preferred dividends divided by the ending common shares outstanding
B) Minus preferred dividends divided by the weighted average of common shares outstanding
C) Divided by the weighted average of common shares outstanding
D) Divided by the ending common shares outstanding

Question 33

A prior period adjustment should be reflected, net of applicable income taxes, in the financial statements of a business entity in the

A) Retained earnings statement after net income but before dividends
B) Retained earnings statement as an adjustment of the opening balance
C) Income statement after income from continuing operations
D) Income statement as part of income from continuing operations

Question 34

Discuss the economic consequences of financial reporting.

Question 35

Discuss the all-inclusive vs. current operating performance views of income.

Question 36

Which of the following is true in accounting for changes in estimates?

A) Changes in estimates are considered as errors.
B) A company recognizes a change in estimate by making a retrospective adjustment to the financial statements.
C) A company accounts for changes in estimates only in the period of change, even though it affects the future periods.
D) Changes in estimates are not carried back to adjust prior years.

Question 37

Antidilutive securities would generally be used in the calculation of Basic Diluted
Earnings per share Earnings per share

A) Yes Yes
B) No Yes
C) No No
D) Yes No

Question 38

A loss should be reported separately as a net-of-tax component of net income when it is which of the following? Unusual Infrequent
In Nature in Occurrence

A) No Yes
B) No No
C) Yes No
D) Yes Yes

Question 39

When a component of a business has been discontinued during the year, this component's operating losses of the current period up to the measurement date should be included in the

A) Income statement as part of the income (loss) from operations of the discontinued component
B) Income statement as part of the loss on disposal of the discontinued component
C) Income statement as part of the income (loss) from continuing operations
D) Retained earnings statement as a direct decrease in retained earnings

Question 40

Define and discuss the accounting treatment for discontinued operations.

Question 41

What is the major distinction between revenues and gains and between expenses and losses?

Question 42

Define comprehensive income. What is the purpose of reporting comprehensive income?

Question 43

What are the two ways that other comprehensive income may be reported on corporate financial statements?

Question 44

Discuss the sources of guidance for recording accounting transactions outlined by IAS No. 8, Accounting Policies, Changes in Accounting Estimates and Errors.

Question 45

Obtain a company's income statement and ask the students to compute the following:
a. Gross profit percentage
b. Net profit percentage
c. Operating profit percentage
d. Price earnings ratio
These answers depend on the company chosen.