Deck 4: Income Statement and Related Information

Question 1

The phrase "income from continuing operations" is used only when gains or losses on discontinued operations occur.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

Revenues and gains increase both net income and owners' equity.

Answer 3

True

Question 4

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

Question 5

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

Question 6

The components of other comprehensive income can be reported in the statement of comprehensive income.

Question 7

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

Question 8

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

Question 9

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

Question 10

A company that reports a discontinued operation or an extraordinary item must report per share amounts for these items.

Question 11

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

Question 12

The income statement is useful in assessing the risk or uncertainty of achieving future cash flows.

Question 13

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

Question 14

A company should report a restructuring charge as an extraordinary item because these write-offs are not part of a company's ordinary and typical activities.

Question 15

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

Question 16

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

Question 17

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

Question 18

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

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

Which of the following is an example of managing earnings up?

A) Decreasing estimated salvage value of equipment.
B) Writing off obsolete inventory.
C) Underestimating warranty claims.
D) Accruing a contingent liability for an ongoing lawsuit.

Question 22

The occurrence which most likely would have no effect on 2014 net income (assuming that all amounts involved are material) is the

A) sale in 2014 of an office building contributed by a stockholder in 1983.
B) collection in 2014 of a receivable from a customer whose account was written off in 2013 by a charge to the allowance account.
C) settlement based on litigation in 2014 of previously unrecognized damages from a serious accident that occurred in 2012.
D) worthlessness determined in 2014 of stock purchased on a speculative basis in 2010.

Question 23

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 24

Which of the following is false about an income statement?

A) Items that cannot be measured reliably are not reported in the income statement.
B) It is used to measure the solvency of a company.
C) Income measurement involves judgment.
D) Income numbers are affected by the accounting methods employed.

Question 25

The occurrence that most likely would have no effect on 2014 net income is the

A) sale in 2014 of an office building contributed by a stockholder in 1961.
B) collection in 2014 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 1996 deemed worthless in 2014.

Question 26

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 27

What might a manager do during the last quarter of a fiscal year if she wanted to decrease current annual net income?

A) Delay shipments and sales to customers until after the end of the fiscal year.
B) Relax credit policies for customers.
C) Pay suppliers all amounts owed.
D) Delay purchases from suppliers until after the end of the fiscal year.

Question 28

The income statement provides investors and creditors with information to predict all of the following except the:

A) amount of future cash flows.
B) sources of future cash flows.
C) timing of future cash flows.
D) uncertainty of future cash flows.

Question 29

Which of the following is an example of managing earnings down?

A) Changing estimated bad debts from 3 percent to 2.5 percent of sales.
B) Revising the estimated life of equipment from 10 years to 8 years.
C) Not writing off obsolete inventory.
D) Reducing research and development expenditures.

Question 30

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 31

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 32

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 answer choices are correct.

Question 33

The single-step income statement emphasizes

A) the gross profit figure.
B) total revenues and total expenses.
C) operating and non-operating expenses.
D) the various components of income from continuing operations.

Question 34

The accountant for the Lintz Sales Company is preparing the income statement for 2014 and the balance sheet at December 31, 2014. The January 1, 2014 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 35

What might a manager do during the last quarter of a fiscal year if she wanted to improve current annual net income?

A) Increase research and development activities.
B) Relax credit policies for customers.
C) Delay shipments to customers until after the end of the fiscal year.
D) Delay purchases from suppliers until after the end of the fiscal year.

Question 36

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) revenues, irregular items, and general expenses.

Question 37

Which of the following is an advantage of the single-step income statement over the multiple-step income statement?

A) It reports gross profit for the year.
B) Expenses are classified by function.
C) It matches costs and expenses with related revenues.
D) It does not imply that one type of revenue or expense has priority over another.

Question 38

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

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

Question 39

Which of the following is not a selling expense?

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

Question 40

Which of the following is true about the information provided in the income statement?

A) It helps in evaluating the past performance of the enterprise.
B) It provides a basis for predicting future performance.
C) It helps assess the risk or uncertainty of achieving future cash flows.
D) All of these answer choices are correct.

Question 41

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 42

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 43

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

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

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 continuing operations, discontinued 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

In calculating earnings per share, companies deduct preferred dividends from net income if:

A) they are noncumulative though not declared.
B) the dividends are declared.
C) they are convertible preferred shares.
D) they are callable preferred shares.

Question 46

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 but before extraordinary items.
D) a bulk sale of plant assets included in income from continuing operations.

Question 47

Income taxes are allocated to

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

Question 48

Where must earnings per share be disclosed in the financial statements to satisfy generally accepted accounting principles?

A) On the face of the statement of retained earnings (or, statement of stockholders' equity.)
B) In the footnotes to the financial statements.
C) On the face of the income statement.
D) On the face of the balance sheet.

Question 49

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 50

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 combined with other items if not material in amount.
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 51

Which of the following items would be reported at its gross amount on the face of the income statement?

A) Extraordinary loss
B) Prior period adjustment
C) Cumulative effect of a change in an accounting principle
D) Unusual gain

Question 52

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 53

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 54

Companies use intraperiod tax allocation for all of the following items except

A) discontinued operations.
B) extraordinary items.
C) changes in accounting estimates.
D) income from continuing operations.

Question 55

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) net income of the period in which the change occurred.
C) comprehensive income for the earliest period presented.
D) stockholders' equity of the period in which the change occurred.

Question 56

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

Question 57

Which of the following earnings per share figures must be disclosed on the face of the income statement?

A) EPS for income before taxes.
B) The effect on EPS from unusual items.
C) EPS for gross profit.
D) EPS for income from continuing operations.

Question 58

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

Question 59

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 60

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 61

Gross billings for merchandise sold by Lang Company to its customers last year amounted to $11,720,000; sales returns and allowances were $370,000, sales discounts were $175,000, and freight-out was $140,000. Net sales last year for Lang Company were

A) $11,720,000.
B) $11,350,000.
C) $11,175,000.
D) $11,035,000.

Question 62

If plant assets of a manufacturing company are sold at a gain of $1,500,000 less related taxes of $450,000, and the gain is not considered unusual or infrequent, the income statement for the period would disclose these effects as

A) a gain of $1,500,000 and an increase in income tax expense of $450,000.
B) operating income net of applicable taxes, $1,050,000.
C) a prior period adjustment net of applicable taxes, $1,050,000.
D) an extraordinary item net of applicable taxes, $1,050,000.

Question 63

Dole Company, with an applicable income tax rate of 30%, reported net income of $350,000. Included in income for the period was an extraordinary loss from flood damage of $80,000 before deducting the related tax effect. The company's income before income taxes and extraordinary items was

A) $430,000.
B) $500,000.
C) $580,000.
D) $406,000.

Question 64

For Mortenson Company, the following information is available: In Mortenson's multiple-step income statement, gross profit

A) should not be reported
B) should be reported at $17,000.
C) should be reported at $70,000.
D) should be reported at $75,000.

Question 65

For Mortenson Company, the following information is available: In Mortenson's single-step income statement, gross profit

A) should not be reported.
B) should be reported at $17,000.
C) should be reported at $70,000.
D) should be reported at $75,000.

Question 66

Watts 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 67

Which of the following is included in comprehensive income?

A) Investments by owners.
B) Unrealized gains on available-for-sale securities.
C) Distributions to owners.
D) Changes in accounting principles.

Question 68

Manning Company has the following items: write-down of inventories, $360,000; loss on disposal of Sports Division, $555,000; and loss due to strike, $359,000. Ignoring income taxes, what amount should Manning Company report as extraordinary losses?

A) $ -0-.
B) $555,000.
C) $719,000.
D) $914,000.

Question 69

Ortiz Co. had the following account balances: What would Ortiz report as total expenses in a single-step income statement?

A) $210,500
B) $221,000
C) $204,500
D) $ 94,500

Question 70

Earnings per share data are required on the face of the

A) statement of retained earnings
B) statement of stockholders' equity
C) income statement
D) balance sheet

Question 71

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 72

Garwood Company has the following items: write-down of inventories, $360,000; loss on disposal of Sports Division, $555,000; and loss due to an expropriation, $359,000. Ignoring income taxes, what amount should Garwood Company report as extraordinary losses?

A) $359,000
B) $555,000.
C) $719,000.
D) $914,000.

Question 73

The following information was extracted from the 2014 financial statements of Max Company: The amount reported for other expenses and losses is

A) $141,000
B) $39,000.
C) $110,000.
D) $150,000.

Question 74

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) All of these are acceptable ways

Question 75

An income statement shows "income before income taxes and extraordinary items" in the amount of $3,425,000. The income taxes payable for the year are $1,800,000, including $600,000 that is applicable to an extraordinary gain. Thus, the "income before extraordinary items" is

A) $2,225,000.
B) $1,025,000.
C) $2,325,000.
D) $1,125,000.

Question 76

Gains and losses identified as other comprehensive income have the same status as traditional gains and losses under

A) both the one statement and two statement approaches.
B) neither the one statement or two statement approaches.
C) the one statement approach.
D) the two statement approach.

Question 77

A company is not required to report a per share amount on the face of the income statement for which one of the following items?

A) Net income
B) Prior period adjustment
C) Extraordinary item
D) Discontinued operations

Question 78

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 79

A statement of stockholders' equity includes a column for each of the following except

A) accumulated other comprehensive income.
B) common stock.
C) net income.
D) retained earnings.

Question 80

Ortiz Co. had the following account balances: What would Ortiz report as total revenues in a single-step income statement?

A) $239,500
B) $ 35,000
C) $236,000
D) $220,000