Deck 4: Income Statement and Related Information

Question 1

Intraperiod tax allocation relates the income tax expense of the period to the specific items that give rise to the amount of the tax provision.

Answer 1

True

Question 2

Companies report the results of operations of a component of a business that will be disposed of separately from continuing operations.

Answer 2

True

Question 3

Gross profit and income from operations are reported on a multiple-step but not a single-step income statement.

Answer 3

True

Question 4

The accounting profession has adopted a current operating performance approach to income reporting.

Question 5

The components of other comprehensive income can be reported in a statement of stockholders' equity.

Question 6

Dividends declared on common and preferred stock are subtracted from net income in the computation of earnings per share.

Question 7

Gains or losses from exchange or translation of foreign currencies are reported as extraordinary items.

Question 8

Prior period adjustments can either be added or subtracted in the Retained Earnings Statement.

Question 9

Use of a multiple-step income statement will result in the company reporting a higher net income than if they used a single-step income statement.

Question 10

A strength of the income statement as compared to the balance sheet is that items that cannot be measured reliably can be reported in the income statement.

Question 11

The transaction approach of income measurement focuses on the income-related activities that have occurred during the period.

Question 12

Both revenues and gains increase both net income and owners' equity.

Question 13

Earnings management generally makes income statement information more useful for predicting future earnings and cash flows.

Question 14

Companies only restrict retained earnings to comply with contractual requirements or current necessity.

Question 15

Companies frequently report income tax expense as the last item before net income on a single-step income statement.

Question 16

A company that reports a discontinued operation or an extraordinary item has the option of reporting per share amounts for these items.

Question 17

Discontinued operations, extraordinary items, and unusual gains and losses are all reported net of tax in the income statement.

Question 18

The income statement is useful for helping to assess the risk or uncertainty of achieving future cash flows.

Question 19

Comprehensive income includes all changes in equity during a period except those resulting from distributions to owners.

Question 20

The primary advantage of the multiple-step format lies in the simplicity of presentation and the absence of any implication that one type of revenue or expense item has priority over another.

Question 21

Classification as an extraordinary item on the income statement would be appropriate for the

A)gain or loss on disposal of a component of the business.
B)substantial write-off of obsolete inventories.
C)loss from a strike.
D)none of these.

Question 22

Which of the following is never classified as an extraordinary item?

A)Losses from a major casualty.
B)Losses from an expropriation of assets.
C)Gain on a sale of the only security investment a company has ever owned.
D)Losses from exchange or translation of foreign currencies.

Question 23

Under which of the following conditions would material flood damage be considered an extraordinary item for financial reporting purposes?

A)Only if floods in the geographical area are unusual in nature and occur infrequently.
B)Only if the flood damage is material in amount and could have been reduced by prudent management.
C)Under any circumstances as an extraordinary item.
D)Flood damage should never be classified as an extraordinary item.

Question 24

Which of the following is not a selling expense?

A)Advertising expense
B)Office salaries expense
C)Freight-out
D)Store supplies consumed

Question 25

Which of the following is an acceptable method of presenting the income statement?

A)A single-step income statement
B)A multiple-step income statement
C)A consolidated statement of income
D)All of these

Question 26

Which of the following is not a generally practiced method of presenting the income statement?

A)Including prior period adjustments in determining net income
B)The single-step income statement
C)The consolidated statement of income
D)Including gains and losses from discontinued operations of a component of a business in determining net income

Question 27

The occurrence that most likely would have no effect on 2007 net income is the

A)sale in 2007 of an office building contributed by a stockholder in 1961.
B)collection in 2007 of a dividend from an investment.
C)correction of an error in the financial statements of a prior period discovered subsequent to their issuance.
D)stock purchased in 1993 deemed worthless in 2007.

Question 28

The occurrence which most likely would have no effect on 2007 net income (assuming that all amounts involved are material) is the

A)sale in 2007 of an office building contributed by a stockholder in 1983.
B)collection in 2007 of a receivable from a customer whose account was written off in 2006 by a charge to the allowance account.
C)settlement based on litigation in 2007 of previously unrecognized damages from a serious accident which occurred in 2005.
D)worthlessness determined in 2007 of stock purchased on a speculative basis in 2003.

Question 29

The accountant for the Orion Sales Company is preparing the income statement for 2007 and the balance sheet at December 31, 2007.The January 1, 2007 merchandise inventory balance will appear

A)only as an asset on the balance sheet.
B)only in the cost of goods sold section of the income statement.
C)as a deduction in the cost of goods sold section of the income statement and as a current asset on the balance sheet.
D)as an addition in the cost of goods sold section of the income statement and as a current asset on the balance sheet.

Question 30

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

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

Question 31

Which of the following would represent the least likely use of an income statement prepared for a business enterprise?

A)Use by customers to determine a company's ability to provide needed goods and services.
B)Use by labor unions to examine earnings closely as a basis for salary discussions.
C)Use by government agencies to formulate tax and economic policy.
D)Use by investors interested in the financial position of the entity.

Question 32

Limitations of the income statement include all of the following except

A)items that cannot be measured reliably are not reported.
B)only actual amounts are reported in determining net income.
C)income measurement involves judgment.
D)income numbers are affected by the accounting methods employed.

Question 33

Which of these is generally an example of an extraordinary item?

A)Loss incurred because of a strike by employees.
B)Write-off of deferred marketing costs believed to have no future benefit.
C)Gain resulting from the devaluation of the U.S.dollar.
D)Gain resulting from the state exercising its right of eminent domain on a piece of land used as a parking lot.

Question 34

The income statement reveals

A)resources and equities of a firm at a point in time.
B)resources and equities of a firm for a period of time.
C)net earnings (net income) of a firm at a point in time.
D)net earnings (net income) of a firm for a period of time.

Question 35

An item that should be classified as an extraordinary item is

A)write-off of goodwill.
B)gains from transactions involving foreign currencies.
C)losses from moving a plant to another city.
D)gains from a company selling the only investment it has ever owned.

Question 36

Information in the income statement helps users to

A)evaluate the past performance of the enterprise.
B)provide a basis for predicting future performance.
C)help assess the risk or uncertainty of achieving future cash flows.
D)all of these.

Question 37

The single-step income statement emphasizes

A)the gross profit figure.
B)total revenues and total expenses.
C)extraordinary items and accounting changes more than these are emphasized in the multiple-step income statement.
D)the various components of income from continuing operations.

Question 38

Which of the following is a change in accounting principle?

A)A change in the estimated service life of machinery
B)A change from FIFO to LIFO
C)A change from straight-line to double-declining-balance
D)A change from FIFO to LIFO and a change from straight-line to double-declining- balance

Question 39

The major elements of the income statement are

A)revenue, cost of goods sold, selling expenses, and general expense.
B)operating section, nonoperating section, discontinued operations, extraordinary items, and cumulative effect.
C)revenues, expenses, gains, and losses.
D)all of these.

Question 40

How should an unusual event not meeting the criteria for an extraordinary item be disclosed in the financial statements?

A)Shown as a separate item in operating revenues or expenses if material and supple-mented by a footnote if deemed appropriate.
B)Shown in operating revenues or expenses if material but not shown as a separate item.
C)Shown net of income tax after ordinary net earnings but before extraordinary items.
D)Shown net of income tax after extraordinary items but before net earnings.

Question 41

An income statement shows "income before income taxes and extraordinary items" in the amount of $2,055,000.The income taxes payable for the year are $1,080,000, including $360,000 that is applicable to an extraordinary gain.Thus, the "income before extraordinary items" is

A)$1,335,000.
B)$615,000.
C)$1,395,000.
D)$675,000.

Question 42

When a company discontinues an operation and disposes of the discontinued operation (component), the transaction should be included in the income statement as a gain or loss on disposal reported as

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

Question 43

The approach most companies use to provide information related to the components of other comprehensive income is a

A)second separate income statement.
B)combined income statement of comprehensive income.
C)separate column in the statement of changes in stockholders' equity.
D)footnote disclosure.

Question 44

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

A)The gain or loss on disposal 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 continuing operations and net income should be disclosed on the face of the income statement.
D)The gain or loss on disposal should not be segregated, but should be reported together with the results of continuing operations.

Question 45

A correction of an error in prior periods' income will be reported

Question 46

Fleming Company has the following items: write-down of inventories, $240,000; loss on disposal of Sports Division, $370,000; and loss due to an expropriation, $226,000.Ignoring income taxes, what total amount should Fleming Company report as extraordinary losses?

A)$226,000
B)$370,000.
C)$466,000.
D)$596,000.

Question 47

Which of the following is true about intraperiod tax allocation?

A)It arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return.
B)It is required for extraordinary items and cumulative effect of accounting changes but not for prior period adjustments.
C)Its purpose is to allocate income tax expense evenly over a number of accounting periods.
D)Its purpose is to relate the income tax expense to the items which affect the amount of tax.

Question 48

Comprehensive income includes all of the following except

A)dividend revenue.
B)losses on disposal of assets.
C)investments by owners.
D)unrealized holding gains.

Question 49

Earnings per share should always be shown separately for

A)net income and gross margin.
B)net income and pretax income.
C)income before extraordinary items.
D)extraordinary items and prior period adjustments.

Question 50

For Merando Company, the following information is available: $\begin{array}{lr}\text { Cost of goods sold } & \$ 90,000 \\\text { Dividend revenue } & 4,000 \\\text { Income tax expense } & 9,000 \\\text { Operating expenses } & 35,000 \\\text { Sales } & 150,000\end{array}$ In Merando's multiple-step income statement, gross profit

A)should not be reported
B)should be reported at $20,000.
C)should be reported at $60,000.
D)should be reported at $64,000.

Question 51

If plant assets of a manufacturing company are sold at a gain of $820,000 less related taxes of $250,000, and the gain is not considered unusual or infrequent, the income statement for the period would disclose these effects as

A)a gain of $820,000 and an increase in income tax expense of $250,000.
B)operating income net of applicable taxes, $570,000.
C)a prior period adjustment net of applicable taxes, $570,000.
D)an extraordinary item net of applicable taxes, $570,000.

Question 52

For Garret Wolfe Company, the following information is available: $\begin{array}{lr}\text { Cost of goods sold } & \$ 60,000 \\\text { Dividend revenue } & 2,500 \\\text { Income tax expense } & 6,000 \\\text { Operating expenses } & 23,000 \\\text { Sales } & 100,000\end{array}$ In Garret Wolfe's multiple-step income statement, gross profit

A)should not be reported
B)should be reported at $13,500.
C)should be reported at $40,000.
D)should be reported at $42,500.

Question 53

Which of the following items will not appear in the retained earnings statement?

A)Net loss
B)Prior period adjustment
C)Discontinued operations
D)Dividends

Question 54

A material item which is unusual in nature or infrequent in occurrence, but not both should be shown in the income statement

Question 55

Gross billings for merchandise sold by Otto Company to its customers last year amounted to $15,720,000; sales returns and allowances were $370,000, sales discounts were $175,000, and freight-out was $140,000.Net sales last year for Otto Company were

A)$15,720,000.
B)$15,350,000.
C)$15,175,000.
D)$15,035,000.

Question 56

For Garret Wolfe Company, the following information is available: $\begin{array}{lr}\text { Cost of goods sold } & \$ 60,000 \\\text { Dividend revenue } & 2,500 \\\text { Income tax expense } & 6,000 \\\text { Operating expenses } & 23,000 \\\text { Sales } & 100,000\end{array}$ In Garret Wolfe's single-step income statement, gross profit

A)should not be reported.
B)should be reported at $13,500.
C)should be reported at $40,000.
D)should be reported at $42,500.

Question 57

Sam Hurd Company has the following items: write-down of inventories, $120,000; loss on disposal of Sports Division, $185,000; and loss due to strike, $113,000.Ignoring income taxes, what total amount should Sam Hurd Company report as extraordinary losses?

A)$ -0-.
B)$185,000.
C)$233,000.
D)$298,000.

Question 58

Shank Corporation made a very large arithmetical error in the preparation of its year-end financial statements by improper placement of a decimal point in the calculation of depreciation.The error caused the net income to be reported at almost double the proper amount.Correction of the error when discovered in the next year should be treated as

A)an increase in depreciation expense for the year in which the error is discovered.
B)a component of income for the year in which the error is discovered, but separately listed on the income statement and fully explained in a note to the financial statements.
C)an extraordinary item for the year in which the error was made.
D)a prior period adjustment.

Question 59

Income taxes are allocated to

A)extraordinary items.
B)discontinued operations.
C)prior period adjustments.
D)all of these.

Question 60

Which one of the following types of losses is excluded from the determination of net income in income statements?

A)Material losses resulting from transactions in the company's investments account.
B)Material losses resulting from unusual sales of assets not acquired for resale.
C)Material losses resulting from the write-off of intangibles.
D)Material losses resulting from correction of errors related to prior periods.

Question 61

Carpino Corporation has an extraordinary loss of $200,000, an unusual gain of $140,000, and a tax rate of 40%.At what amount should Carpino report each item?

Question 62

A review of the December 31, 2007, financial statements of Baden Corporation revealed that under the caption "extraordinary losses," Baden reported a total of $515,000.Further analysis revealed that the $515,000 in losses was comprised of the following items: (1) Baden recorded a loss of $150,000 incurred in the abandonment of equipment formerly used in the business.
(2) In an unusual and infrequent occurrence, a loss of $250,000 was sustained as a result of hurricane damage to a warehouse.
(3) During 2007, several factories were shut down during a major strike by employees, resulting in a loss of $85,000.
(4) Uncollectible accounts receivable of $30,000 were written off as uncollectible.
Ignoring income taxes, what amount of loss should Baden report as extraordinary on its 2007 income statement?

A)$150,000.
B)$250,000.
C)$400,000.
D)$515,000.

Question 63

Dan Nicholson Corporation has an extraordinary loss of $50,000, an unusual gain of $35,000, and a tax rate of 40%.At what amount should Dan Nicholson report each item?

Question 64

Simmons Corporation reports the following information: Correction of understatement of depreciation expense $\begin{array}{lr}\text { in prior years, net of tax } & 430,000 \\\text { Dividends declared } & 320,000 \\\text { Net income } & 1,000,000 \\\text { Retained earnings, 1/1/07, as reported } & 2,000,000\end{array}$ Simmons should report retained earnings, 1/1/07, as adjusted at

A)$1,570,000.
B)$2,000,000.
C)$2,430,000.
D)$3,110,000.

Question 65

Silas Company reported the following information for 2007: $\begin{array}{lr}\text { Sales revenue } & \$ 500,000 \\\text { Cost of goods sold } & 350,000 \\\text { Operating expenses } & 55,000 \\\text { Unrealized holding gain on available-for-sale securities } & 20,000 \\\text { Cash dividends received on the securities } & 2,000\end{array}$ For 2007, Silas would report comprehensive income of

A)$117,000.
B)$115,000.
C)$97,000.
D)$20,000.

Question 66

Joe Novak Corporation reports the following information: Correction of overstatement of depreciation expense $\begin{array}{lr}\text { in prior years, net of tax } & \$ 215,000 \\\text { Dividends declared } & 160,000 \\\text { Net income } & 500,000 \\\text { Retained earnings, } 1 / 1 / 07 \text { as reported } & 1,000,000\end{array}$ Joe Novak should report retained earnings, 12/31/07, at

A)$785,000.
B)$1,125,000.
C)$1,340,000.
D)$1,555,000.

Question 67

Joe Novak Corporation reports the following information: Correction of overstatement of depreciation expense $\begin{array}{lr}\text { in prior years, net of tax } & \$ 215,000 \\\text { Dividends declared } & 160,000 \\\text { Net income } & 500,000 \\\text { Retained earnings, } 1 / 1 / 07 \text { as reported } & 1,000,000\end{array}$ Joe Novak should report retained earnings, 1/1/07, as adjusted at

A)$785,000.
B)$1,000,000.
C)$1,215,000.
D)$1,555,000.

Question 68

Use the following information for questions
At Hall Company, events and transactions during 2007 included the following.The tax rate for all items is 30%.
(1) Depreciation for 2005 was found to be understated by $30,000.
(2) A strike by the employees of a supplier resulted in a loss of $25,000.
(3) The inventory at December 31, 2005 was overstated by $40,000.
(4) A flood destroyed a building that had a book value of $500,000.Floods are very uncommon in that area.
The effect of these events and transactions on 2007 net income net of tax would be

A)$17,500.
B)$367,500.
C)$388,500.
D)$416,500.

Question 69

Craig Rusch Corporation reports the following information: $$\begin{array} { l r } \text { Net income } & \$ 500,000 \\\text { Dividends on common stock } & 140,000 \\\text { Dividends on preferred stock } & 60,000 \\\text { Weighted average common shares outstanding } & 100,000\end{array}$$ Rusch should report earnings per share of

A)$3.00.
B)$3.60
C)$4.40.
D)$5.00.

Question 70

Use the following information for questions
At Hall Company, events and transactions during 2007 included the following.The tax rate for all items is 30%.
(1) Depreciation for 2005 was found to be understated by $30,000.
(2) A strike by the employees of a supplier resulted in a loss of $25,000.
(3) The inventory at December 31, 2005 was overstated by $40,000.
(4) A flood destroyed a building that had a book value of $500,000.Floods are very uncommon in that area.
The effect of these events and transactions on 2007 income from continuing operations net of tax would be

A)$17,500.
B)$38,500.
C)$66,500.
D)$416,500.

Question 71

The following information was extracted from the accounts of Boone Corporation at December 31, 2007: $\begin{array}{lr}&CR(DR)\\\text { Total reported income since incorporation } & \$ 1,700,000 \\\text { Total cash dividends paid } & (800,000) \\\text { Unrealized holding loss } & (120,000) \\\text { Total stock dividends distributed } & (200,000) \\\text { Prior period adjustment, recorded January 1, } 2007 & 75,000\end{array}$ What should be the balance of retained earnings at December 31, 2007?

A)$655,000.
B)$700,000.
C)$580,000.
D)$775,000.

Question 72

The following items were among those that were reported on Nen Co.'s income statement for the year ended December 31, 2007: $$\begin{array} { l r } \text { Legal and audit fees } & \$ 130,000 \\\text { Rent for office space } & 180,000 \\\text { Interest on inventory floor plan } & 210,000 \\\text { Loss on abandoned equipment used in operations } & 35,000\end{array}$$ The office space is used equally by Nen's sales and accounting departments.What amount of the above-listed items should be classified as general and administrative expenses in Nen's multiple-step income statement?

A)$220,000.
B)$255,000.
C)$310,000.
D)$430,000.

Question 73

Edmonds Corporation reports the following information: $$\begin{array} { l r } \text { Net income } & \$ 500,000 \\\text { Dividends on common stock } & 140,000 \\\text { Dividends on preferred stock } & 60,000 \\\text { Weighted average common shares outstanding } & 200,000\end{array}$$ Edmonds should report earnings per share of

A)$1.50.
B)$1.80
C)$2.20.
D)$2.50.

Question 74

During 2007, Gomez Corporation disposed of Pine Division, a major component of its business.Gomez realized a gain of $1,200,000, net of taxes, on the sale of Pine's assets.Pine's operating losses, net of taxes, were $1,400,000 in 2007.How should these facts be reported in Gomez's income statement for 2007?

Question 75

Use the following information for questions
Meyer Corp.reports operating expenses in two categories: (1) selling and (2) general and administrative.The adjusted trial balance at December 31, 2007, included the following expense accounts: $$\begin{array} { l r } \text { Accounting and legal fees } & \$ 140,000 \\\text { Advertising } & 120,000 \\\text { Freight-out } & 75,000 \\\text { Interest } & 60,000 \\\text { Loss on sale of long-term investments } & 30,000 \\\text { Officers' salaries } & 180,000 \\\text { Rent for office space } & 180,000 \\\text { Sales salaries and commissions } & 110,000\end{array}$$ One-half of the rented premises is occupied by the sales department.

-How much of the expenses listed above should be included in Meyer's selling expenses for 2007?

A)$230,000.
B)$305,000.
C)$320,000.
D)$395,000.

Question 76

Cole Company, with an applicable income tax rate of 30%, reported net income of $210,000.Included in income for the period was an extraordinary loss from flood damage of $30,000 before deducting the related tax effect.The company's income before income taxes and extraordinary items was

A)$240,000.
B)$300,000.
C)$330,000.
D)$231,000.

Question 77

Use the following information for questions
Meyer Corp.reports operating expenses in two categories: (1) selling and (2) general and administrative.The adjusted trial balance at December 31, 2007, included the following expense accounts: $$\begin{array} { l r } \text { Accounting and legal fees } & \$ 140,000 \\\text { Advertising } & 120,000 \\\text { Freight-out } & 75,000 \\\text { Interest } & 60,000 \\\text { Loss on sale of long-term investments } & 30,000 \\\text { Officers' salaries } & 180,000 \\\text { Rent for office space } & 180,000 \\\text { Sales salaries and commissions } & 110,000\end{array}$$ One-half of the rented premises is occupied by the sales department.

-How much of the expenses listed above should be included in Meyer's general and administrative expenses for 2007?

A)$410,000.
B)$440,000.
C)$470,000.
D)$500,000.

Question 78

Bowen Corp.reports operating expenses in two categories: (1) selling and (2) general and administrative.The adjusted trial balance at December 31, 2007 included the following expense and loss accounts: $\begin{array}{lr}\text { Accounting and legal fees } & 140,000 \\\text { Advertising } & 180,000 \\\text { Freight-out } & 80,000 \\\text { Interest } & 70,000 \\\text { Loss on sale of long-term investment } & 30,000 \\\text { Officers' salaries } & 225,000 \\\text { Rent for office space } & 220,000 \\\text { Sales salaries and commissions } & 170,000\end{array}$ One-half of the rented premises is occupied by the sales department.Bowen's total selling expenses for 2007 are

A)$540,000.
B)$460,000.
C)$430,000.
D)$370,000.

Question 79

Penn Company reported the following information for 2007: $$\begin{array} { l r } \text { Sales revenue } & \$ 510,000 \\\text { Cost of goods sold } & 350,000 \\\text { Operating expenses } & 55,000 \\\text { Unrealized holding gain on available-for-sale securities } & 40,000 \\\text { Cash dividends received on the securities } & 2,000\end{array}$$ For 2007, Penn would report other comprehensive income of

A)$137,000.
B)$135,000.
C)$42,000.
D)$40,000.

Question 80

Simmons Corporation reports the following information: Correction of understatement of depreciation expense $\begin{array}{lr}\text { in prior years, net of tax } & 430,000 \\\text { Dividends declared } & 320,000 \\\text { Net income } & 1,000,000 \\\text { Retained earnings, 1/1/07, as reported } & 2,000,000\end{array}$ Simmons should report retained earnings, 12/31/07, as adjusted at

A)$1,570,000.
B)$2,250,000.
C)$2,680,000.
D)$3,110,000.