Deck 11: The Income Statement and the Statement of Stockholders Equity

Question 1

Which statement below is true regarding EPS and a company's financial statements?

A)EPS is based on the weighted- average shares of common stock outstanding for an accounting period.
B)An EPS figure should be calculated and presented for each significant element of net income on the income statement.
C)EPS based on the actual outstanding number of common shares of stock is called diluted EPS.
D)The EPS calculation never takes into consideration preferred stock or preferred stock dividends.

Answer 1

B

Question 2

Jennings Corporation's net income for the current year was $270,000. The corporation had outstanding 5,000 shares of 10%, $100 par value nonconvertible preferred stock and 10,000 shares of $20 par value common stock. No shares were issued or retired during the year. The amount of income to be used in the basic calculation of earnings per share is:

A)$245,000.
B)$220,000.
C)$350,000.
D)$285,000.

Answer 2

B

Question 3

Ethelred Corp. reported net income for the current year of $480,000. Ethelred Corp. had 8,500 shares of $100 par value, 15% preferred stock outstanding and 50,000 shares of $10 par value common stock outstanding for the entire year. Earnings per share was:

A)$7.05.
B)$7.20.
C)$8.00.
D)$6.67.

Answer 3

A

Question 4

The actual market value of a corporation can be calculated by:

A)subtracting the current market price per share from the shares outstanding.
B)dividing the current market price per share by the shares outstanding.
C)multiplying the shares outstanding times the current market price per share.
D)dividing the shares outstanding times the current market price per share.

Question 5

The amount of cash dividends declared during the period and the amount of cash dividends paid during the period are reflected in the:

A)statement of stockholders' equity and the statement of cash flows, respectively.
B)statement of retained earnings and statement of cash flows, respectively.
C)statement of stockholders' equity and income statement, respectively.
D)statement of cash flows and statement of stockholders' equity, respectively.

Question 6

The primary responsibility of the independent auditor is to decide whether the company's:

A)financial statements comply with generally accepted accounting principles GAAP).
B)management has complied with all applicable laws and regulations during the fiscal year under audit.
C)financial statements are free from errors.
D)internal controls are effective.

Question 7

A statement of stockholders' equity would not include which type of transaction?

A)Treasury stock reissued by the corporation
B)Inventory acquired for cash
C)Land exchanged for common stock
D)Stock dividends declared by the board of directors

Question 8

Corrections to the beginning balance of Retained Earnings for errors of an earlier period are called:

A)extraordinary items.
B)prior- period adjustments.
C)cumulative effect of change in accounting principle.
D)cumulative error adjustments.

Question 9

EPS is used in computing which financial ratio?

A)The times- interest- earned ratio
B)The price/earnings ratio
C)The rate of return on total assets
D)The investment capitalization rate

Question 10

The estimated value of a company's stock exceeds the current market value of the company. The appropriate investment decision should be:

A)to buy the company's stock.
B)to hold the company's stock.
C)to sell the company's stock.
D)none of the above. The analyst does not have sufficient information to make a prudent investment decision in this situation.

Question 11

The paragraph in a typical audit report that describes how the audit was performed is the:

A)first paragraph.
B)footnotes to the audit report.
C)second paragraph.
D)third paragraph.

Question 12

Earnings per share EPS)is calculated as:

A)the number of shares of common stock outstanding at the end of the year divided by net income.
B)net income divided by the number of shares of common stock outstanding at the end of the year.
C)the average number of shares of common stock outstanding throughout the year divided by net income.
D)net income divided by the average number of shares of common stock outstanding throughout the year.

Question 13

On January 1, Victory Corporation's Common Stock account had a balance of $100,000, representing 20,000 shares of $5 par value issued at $40 per share. On May 15, 5,000 shares were issued for $120,000 cash. On August 31, a 10% stock dividend was declared and distributed. What is the balance in Common Stock appearing on the statement of stockholders' equity on December 31?

A)$240,000
B)$137,500
C)$237,500
D)$257,500

Question 14

Earnings per share is computed for which of the following?

A)Discontinued operations
B)Comprehensive income
C)Prior- period adjustments
D)All of the above

Question 15

A statement of stockholders' equity would not include which type of transaction?

A)Foreign exchange gain
B)Treasury stock reacquired by the corporation
C)Cash dividends declared by the board of directors
D)Cumulative translation adjustment

Question 16

Which of the following transactions would NOT affect the Common Stock account?

A)Issue additional shares of stock
B)Purchase treasury stock
C)Issue stock dividend
D)Any of the above transactions

Question 17

One Love Corporation originally issued 50,000 shares of $10 par value common stock at $15 per share. During the current year, One Love Corporation issued 4,000 shares of its common stock at $14 per share, reacquired 3,500 shares of its common stock for $18 per share, and reissued 2,500 shares of treasury stock at $14 per share. The balance in Additional Paid- in Capital on December 31 is:

A)$235,000.
B)$263,000.
C)$238,000.
D)$266,000.

Question 18

The financial statement that reports the changes in all categories of equity during the period is called the:

A)statement of changes in financial position.
B)statement of retained earnings.
C)statement of stockholders' equity.
D)statement of change in total equity.

Question 19

The gain or loss on the disposal of a business segment is shown on the income statement as:

A)an extraordinary item.
B)other gains or losses.
C)a component of comprehensive income.
D)part of discontinued operations.

Question 20

Elkhorn Corporation has pretax accounting income of $636,000 and taxable income of $748,000. The company's income tax rate is 35%. The entry to record the income tax includes a:

A)credit to Income Tax Payable for $222,600.
B)credit to Deferred Tax Liability for $39,200.
C)debit to Income Tax Expense for $261,800.
D)debit to Deferred Tax Asset for $39,200.

Question 21

A company is required to report both basic and diluted earnings per share when the:

A)company reports both net income and comprehensive income.
B)company has extraordinary gains and losses.
C)company's capital structure includes convertible preferred stock.
D)company's outstanding stock is less than its issued stock.

Question 22

On January 1, Scuppernong Corporation's Common Stock account had a balance of $300,000, representing 30,000 shares of $10 par value issued at par. On July 1, 6,000 shares were issued for $60,000 cash. On October 1, a 10% stock dividend was declared and distributed. On November 30, 15,000 shares were reacquired by the corporation at $12 per share. What is the balance in Common Stock appearing on the statement of stockholders' equity on December 31?

A)$246,000
B)$216,000
C)$396,000
D)$360,000

Question 23

Current earnings per share information is as follows: The interest capitalization rate is 8%. How much should an investor pay for a share of stock?

A)$40.63
B)$25.63
C)$31.88
D)$28.13

Question 24

Which of the following should probably be included when estimating future earnings? i. income from continuing operations
Ii. gain on sale of business segment
Iii. loss due to natural disaster

A)i and iii only
B)i only
C)i and ii
D)All of these answers are correct.

Question 25

On a Statement of Stockholders' Equity, treasury stock transactions affect:

A)common stock.
B)retained earnings and common stock.
C)common stock and additional paid- in capital.
D)additional paid- in capital.

Question 26

Net income was understated in the previous year. The entry to record the correction includes a:

A)credit to Retained Earnings.
B)credit to Income Summary.
C)debit to Retained Earnings.
D)debit to Income Summary.

Question 27

A business incurs a loss from a hurricane. It is the first time the business has had a loss from such an event. This loss would probably be classified on an income statement as an:

A)adjustment to the beginning balance of retained earnings.
B)extraordinary item.
C)operating expense.
D)other expense item.

Question 28

A company sold an unused building at a loss. The loss from this event would be shown as:

A)a normal business occurrence requiring an adjustment to the beginning balance in Retained Earnings.
B)other gains and losses.
C)an extraordinary item.
D)a prior- period adjustment.

Question 29

An audit opinion stating that the statements are unreliable is known as an):

A)disclaimer.
B)clean opinion.
C)adverse opinion.
D)qualified opinion.

Question 30

A company that switches from straight- line depreciation to double- declining- balance depreciation during an accounting period must report this change on the financial statements as:

A)a prior- period adjustment.
B)a cumulative effect of a change in accounting principle.
C)income from continuing operations.
D)an extraordinary item.

Question 31

Deferred tax liability is normally classified as a and income tax payable is classified as a on the balance sheet.

A)current liability; long- term liability
B)long- term liability; current liability
C)long- term liability; long- term liability
D)current liability; current liability

Question 32

A statement of responsibility declares that:

A)management is responsible for the financial statements, and the statements are prepared in accordance with GAAP.
B)the auditors are responsible for the financial statements, and the statements are free from material misstatement.
C)the auditors are responsible for the financial statements, and the statements are prepared in accordance with GAAP.
D)management is responsible for the financial statements, and the statements are free from material misstatement.

Question 33

On January 1, Polk Corporation's Retained Earnings account had a balance of $625,000. During the year, cash dividends of $27,000 and stock dividends with a market value of $53,000 were declared and distributed. Polk Corporation reported a net loss of $7,000 for the year. What is the balance in Retained Earnings on December 31?

A)$625,000
B)$620,000
C)$545,000
D)$538,000

Question 34

A company incurs a loss due to restructuring. This is the first time the company has experienced a restructuring. The loss from this event would be shown as:

A)a normal business occurrence requiring an adjustment to the beginning balance in Retained Earnings.
B)an extraordinary item.
C)a prior- period adjustment.
D)other gains and losses.

Question 35

Pretax accounting income is found on the:

A)balance sheet and income statement.
B)income statement.
C)tax return.
D)tax return and income statement.

Question 36

When pretax accounting income exceeds taxable income:

A)Deferred Tax Asset is debited.
B)Prepaid Income Tax is credited.
C)Prepaid Income Tax is debited.
D)Deferred Tax Liability is credited.

Question 37

Lansing Corporation reported depreciation expense of $50,000 to compute pretax accounting income and depreciation expense of $90,000 to compute taxable income. Lansing's tax rate is 40%. Lansing will report a:

A)Deferred Tax Liability of $20,000.
B)Deferred Tax Asset of $16,000.
C)Deferred Tax Asset of $20,000.
D)Deferred Tax Liability of $16,000.

Question 38

Which items are excluded from the determination of net income but are included in the determination of other comprehensive income?

A)Foreign currency exchange gains and losses
B)Foreign currency translation adjustments
C)Realized gains and losses on the sale of available- for- sale securities
D)All of the above

Question 39

Which of the following transactions affect Retained Earnings?

A)Declare cash dividend
B)Earn net income
C)Issue stock divided
D)All of the above transactions

Question 40

Unrealized gains or losses on available- for- sale investments are reported as:

A)other comprehensive income, since these items do not enter into the determination of net income.
B)part of a company's net income or loss from its continuing operations.
C)part of a company's pro forma earnings only.
D)none of these.

Question 41

Aziz Corporation has taxable income of $525,000 and pretax accounting income of $495,000. The company's income tax rate is 35%. The company's income tax rate is 35%. The entry to record the income tax includes a:

A)credit to Income Tax Payable for $183,750.
B)credit to Income Tax Payable for $173,250.
C)debit to Income Tax Payable for $173,250.
D)debit to Income Tax Expense for $183,750.

Question 42

Which entity requires companies issuing publicly traded stock to have their financial statements audited by an external auditor?

A)Internal Revenue Service
B)Consumer Protection Agency
C)Financial Accounting Standards Board
D)Securities and Exchange Commission

Question 43

When income tax payable exceeds income tax expense,:

A)Deferred Tax Asset is debited.
B)Prepaid Income Tax is credited.
C)Deferred Tax Liability is credited.
D)Accumulated Income Tax is debited.

Question 44

A statement of responsibility issued along with a company's financial statements indicates that the financial statements are the responsibility of:

A)the auditors.
B)the shareholders.
C)management.
D)the board of directors.

Question 45

An audit opinion stating that the statements are presented in accordance with GAAP is known as an):

A)adverse opinion.
B)qualified opinion.
C)disclaimer.
D)clean opinion.

Question 46

Which of the following would probably be reported as an extraordinary gain or loss?

A)Natural disaster
B)Retiring bonds payable
C)Corporate restructuring
D)All of the above

Question 47

Which of the following must be reported on the income statement as a cumulative effect of change in accounting principle?

A)Change from straight- line to double- declining- balance method of computing depreciation
B)Change from double- declining- balance to straight- line method of computing depreciation
C)Both A and B
D)Neither A nor B

Question 48

On January 1, Kimberling Corporation's Retained Earnings account had a balance of $400,000. During the year, the board of directors declared cash dividends of $50,000 and stock dividends with a market value of $40,000. Net income for the year amounted to $120,000. What is the balance in Retained Earnings appearing on the statement of stockholders' equity on December 31?

A)$350,000
B)$310,000
C)$470,000
D)$430,000

Question 49

Prior- period adjustments are added to or deducted from:

A)total stockholders' equity.
B)income from continuing operations to compute net income.
C)net income to compute comprehensive income.
D)beginning retained earnings.

Question 50

The value of a company's stock can be estimated by dividing the:

A)dividing the company's investment capitalization rate by retained earnings.
B)company's retained earnings by the estimated annual income in the future.
C)company's current annual income by the future estimated investment capitalization rate.
D)company's estimated annual income in the future by the investment capitalization rate.

Question 51

Walters Ltd. has taxable income of $482,000 and pretax accounting income of $566,000. The company's income tax rate is 35%. The entry to record the income tax includes a:

A)credit to Income Tax Payable for $168,700.
B)debit to Income Tax Payable for $168,700.
C)credit to Income Tax Payable for $198,100.
D)credit to Income Tax Expense for $198,100.

Question 52

Putman Corporation reported income from continuing operations of $58,000 and net income of $65,000. Putman had 200,000 shares of $2.00 par value common stock outstanding for the year. The capitalization rate is 12%. The appropriate investment decision should be to:

A)sell the stock.
B)hold the stock.
C)buy the stock.
D)get additional information before making a decision.

Question 53

When computing earnings per share, preferred dividends are:

A)added to common shares in the denominator of the EPS calculation.
B)subtracted from net income in the numerator of the EPS calculation.
C)added to net income in the numerator of the EPS calculation.
D)subtracted from common shares in the denominator of the EPS calculation.

Question 54

The gain on the early retirement of debt is usually classified on the income statement as:

A)a reduction in operating expenses.
B)ordinary revenue.
C)other gains and losses.
D)an extraordinary gain.

Question 55

In which paragraph, if any, of a standard unqualified audit report does the auditor state his or her opinion regarding the effectiveness of the company's internal controls?

A)The footnotes to the audit report
B)None. The auditor does not state an opinion regarding the effectiveness of the company's internal controls.
C)Second paragraph
D)Third paragraph

Question 56

Items appear on the income statement in which order?

A)Extraordinary gains and losses, income from continuing operations, change in accounting principle, and discontinued operations
B)Change in accounting principle, discontinued operations, extraordinary gains and losses, and income from continuing operations
C)Discontinued operations, extraordinary gains and losses, income from continuing operations, and change in accounting principle
D)Income from continuing operations, discontinued operations, extraordinary gains and losses, and change in accounting principle

Question 57

Which of the following criteria must be met before an item is considered extraordinary?

A)The item must be infrequent in its occurrence.
B)The item must either unusual in nature or infrequent in its occurrence.
C)The item must be unusual in its nature.
D)The item must be both unusual in nature and infrequent in occurrence.

Question 58

Honest Sam's Corporation has pretax accounting income of $395,000 and taxable income of $375,000. The company's income tax rate is 35%. The entry to record the income tax includes a:

A)debit to Deferred Tax Asset for $138,250.
B)debit to Deferred Tax Asset for $7,000.
C)credit to Deferred Tax Liability for $138,250.
D)credit to Deferred Tax Liability for $7,000.

Question 59

Maya Company has taxable income of $729,000 and pretax accounting income of $772,000. The company's income tax rate is 35%. What are the company's current and long- term tax liabilities?

A)Current liability $9,800; long- term liability $255,150
B)Current liability $0; long- term liability $264,950
C)Current liability $255,150; long- term liability $9,800
D)Current liability $264,950; long- term liability $0

Question 60

Taxable income is found on the:

A)tax return and income statement.
B)balance sheet and income statement.
C)tax return.
D)income statement.

Question 61

Corrections to the beginning balance of Retained Earnings for errors found within the current period are called prior- period adjustments.

Question 62

Under the accrual method of accounting, revenues and gains are recorded when they occur, regardless of when the company receives or pays cash.

Question 63

When management issues a statement of responsibility, management declares its responsibility for the financial statements and states that they conform to GAAP.

Question 64

The most common difference between accounting income and taxable income is when a corporation uses straight- line depreciation in its financial statements and accelerated depreciation in its tax return.

Question 65

Prior- period adjustments are reported on the income statement for the period in which it is discovered an adjustment is necessary.

Question 66

Comprehensive income includes net income less unrealized gains or losses on available- for- sale investments.

Question 67

Independent auditors prepare the financial statements so they comply with GAAP.

Question 68

Unrealized gains and losses or available- for- sale investments is part of other comprehensive income.

Question 69

The statement of retained earnings is more comprehensive than the statement of stockholders' equity.

Question 70

Gains and losses are considered extraordinary if they arise from transactions which are unusual or infrequent.

Question 71

The foreign- currency translation adjustment is part of other comprehensive income.

Question 72

Earnings per share must be computed for both net income and comprehensive income.

Question 73

A statement of stockholder's equity reports all items affecting stockholders' equity for a period.

Question 74

Comprehensive income is the company's change in total stockholders' equity from all sources other than from the owners of the business.

Question 75

The cumulative effect of a previously recorded accounting error is known as a prior- period adjustment.

Question 76

Operating income excludes income from discontinued operations.

Question 77

The loss on sale of a business segment is reported in Other Gains and Losses on the income statement.

Question 78

A statement of responsibility is not a required for a company's annual report, but it is typically included because it is desired by stockholders.

Question 79

Gains and losses on the sale of available- for- sale securities are used to compute comprehensive income.

Question 80

Companies generally use an accelerated method to compute depreciation for tax purposes and the straight- line method to compute depreciation for the financial statements.