Deck 9: The Corporate Income Statement and Financial Analysis

Question 1

Which of the following would be included on an income statement?

Answer 1

B

Question 2

Which of the following items should not be included in income from operations?

A) Cost of Goods Sold
B) Depreciation Expense
C) Sales Revenue
D) Loss from Extraordinary Item
E) Advertising Expense

Answer 2

Loss from Extraordinary Item

Question 3

Which of the following items should be used to help project a firm's future earnings?

Answer 3

C

Question 4

Madison Corporation holds 15% of Amber Corporation's outstanding common stock. Madison should account for this investment

A) using the equity method.
B) as an intangible asset.
C) as an increase to Stockholders' Equity.
D) using consolidation at year-end.
E) using the cost method.

Question 5

Rockwell Corporation holds 40% of Eaton Corporation's outstanding common stock. Rockwell should account for this investment

A) using the equity method.
B) as an intangible asset.
C) as an increase to Stockholders' Equity.
D) using consolidation at year-end.
E) using the cost method.

Question 6

Pearly White Corporation owns 70% of Shiny Smile Corporation's outstanding common stock. Pearly White should account for this investment

A) by recognizing a gain or loss on the shares in current period income at year-end.
B) using the cost method.
C) as an increase to Stockholders' Equity
D) using consolidation at year-end.
E) both a and d.

Question 7

In 2007, Clear Corp. purchased 65% of Zina Co. and retains that percentage interest through 2010. At the end of 2010, Clear Corp.

A) is the parent company and Zina Co. is the minority interest.
B) is the parent company and Zina Co. controls the minority interest.
C) should show its investment in Zina Co. on the year-end balance sheet as a long-term investment.
D) should recognize the dividends of Zina Co. in a Dividends Revenue account.
E) none of the above.

Question 8

Red Corporation bought 75% of the Blue Corporation's outstanding common stock. In this relationship, Red and Blue are, respectively

Question 9

The portion of ownership interest of a subsidiary not owned by the parent company is

A) a temporary difference.
B) an extraordinary item.
C) the majority interest.
D) a permanent difference.
E) the minority interest.

Question 10

On January 1, 2010, Phillip Corporation bought 10% of Dyno Corporation's outstanding stock for $2,000,000 cash. On July 1, 2010, Dyno declared and paid $100,000 cash dividends to its stockholders. Dyno reported $900,000 net income for the fiscal year ended December 31, 2010. What is Phillip's total investment in Dyno at December 31, 2010?

A) $1,980,000
B) $2,000,000
C) $2,160,000
D) $2,180,000
E) $2,640,000

Question 11

On January 1, 2010, Phillip Corporation bought 20% of Dyno Corporation's outstanding stock for $2,000,000 cash. On July 1, 2010, Dyno declared and paid $100,000 cash dividends to its stockholders. Dyno reported $900,000 net income for the fiscal year ended December 31, 2010. What is Phillip's total investment in Dyno at December 31, 2010?

A) $1,980,000
B) $2,000,000
C) $2,160,000
D) $2,180,000
E) $2,640,000

Question 12

Under the cost method of accounting for an investment, the investing company increases

A) its investment account for its share of the investee's earnings and decreases its investment account for its share of the investee's dividends.
B) its investment account for its share of the investee's earnings and increases its dividend revenue account for its share of the investee's dividends.
C) its dividends revenue account for its share of the investee's dividends and increases its investment account for any gain in market value on the investment at year-end.
D) its investment account for any gain in market value on the investment at year-end and records an income statement gain for the same amount.
E) an Unrealized Gain on Market Value Adjustment for any gain in market value on the investment at year-end and increases Retained Earnings for the same amount.

Question 13

Under the equity method of accounting for an investment, the investing company increases

A) its investment account for its share of the investee's earnings and decreases its investment account for its share of the investee's dividends.
B) its investment account for its share of the investee's earnings and increases its dividend revenue account for its share of the investee's dividends.
C) its dividends revenue account for its share of the investee's dividends and increases its investment account for any gain in market value on the investment at year-end.
D) its investment account for any gain in market value on the investment at year-end and records an income statement gain for the same amount.
E) an Unrealized Gain on Market Value Adjustment for any gain in market value on the investment at year-end and increases Retained Earnings for the same amount.

Question 14

The process of consolidation

A) combines the financial statements of a parent and subsidiary by eliminating the stockholders' equity of the parent company.
B) combines the financial statements of a parent and subsidiary eliminates any intercompany transactions between the parent and subsidiary.
C) uses the cost method to record gains and losses associated with the minority interest.
D) creates a minority interest account on the balance sheet of the subsidiary.
E) all of the above are true.

Question 15

On year-end financial statements, minority interest should be shown as a(an)

A) debit balance stockholders' equity account.
B) credit balance "mezzanine" account between liabilities and stockholders' equity.
C) debit balance long-term investment account.
D) credit balance stockholders' equity account.
E) credit balance liability account.

Question 16

On October 1, 2010, K Co. purchased $500,000 of Q Co.'s 10%, 5-year bonds for $514,000. On the date of purchase, K Co. should debit which of the following account(s)?

A) Investment in Q Co. Bonds for $514,000
B) Investment in Q Co. Bonds for $500,000 and Premium on Q Co. Bonds for $14,000
C) Investment in Q Co. Bonds for $500,000 and Interest Expense for $14,000
D) Investment in Q Co. Bonds for $514,000 and credit Discount on Q Co. Bonds for $14,000
E) Equity Investment in Q Co. for $514,000

Question 17

A bond investment is made at a discount from face value. Amortization of that discount will cause Bond Interest Revenue to

A) increase and Bond Discount to decrease.
B) increase and Investment in Bonds to decrease.
C) increase and Investment in Bonds to increase.
D) decrease and Investment in Bonds to decrease.
E) decrease and Investment in Bonds to increase.

Question 18

A bond investment is made at a premium over face value. Amortization of that premium will cause Bond Interest Revenue to

A) increase and Bond Discount to decrease.
B) increase and Investment in Bonds to decrease.
C) increase and Investment in Bonds to increase.
D) decrease and Investment in Bonds to decrease.
E) decrease and Investment in Bonds to increase.

Question 19

Use the following information to answer questions
On November 1, 2010, Alejandro Corporation purchased $300,000 of Beluga Corporation's 5%, 10-year bonds payable. Interest is payable on April 30 and October 31. Alejandro's year-end is December 31. Alejandro uses the straight-line method to amortize and bond discounts or premiums.

-If the bonds were purchased at face value, how much bond interest revenue should Alejandro recognize in 2010?

A) $1,500
B) $2,500
C) $7,500
D) $15,000
E) none of the above

Question 20

Use the following information to answer questions
On November 1, 2010, Alejandro Corporation purchased $300,000 of Beluga Corporation's 5%, 10-year bonds payable. Interest is payable on April 30 and October 31. Alejandro's year-end is December 31. Alejandro uses the straight-line method to amortize and bond discounts or premiums.

-If the bonds were purchased for $295,500, how much bond interest revenue should Alejandro recognize in 2010?

A) $1,100
B) $1,250
C) $1,400
D) $2,575
E) $7,500

Question 21

Use the following information to answer questions
On November 1, 2010, Alejandro Corporation purchased $300,000 of Beluga Corporation's 5%, 10-year bonds payable. Interest is payable on April 30 and October 31. Alejandro's year-end is December 31. Alejandro uses the straight-line method to amortize and bond discounts or premiums.

-If the bonds were purchased for $304,200, how much bond interest revenue should Alejandro recognize in 2010?

A) $1,110
B) $1,250
C) $1,390
D) $2,430
E) $7,500

Question 22

Use the following information to answer questions
On July 1, 2010, L Co. purchased, as an investment, $100,000 of T Co.'s just-issued 10%, 20-year bonds payable. The bonds pay interest annually on June 30. L Co. intends to hold the bonds to maturity. L Co. uses the straight-line method to amortize and bond discounts or premiums.

-If L Co. paid $97,000 for the bonds, at December 31, 2010, L Co. will show its Investment in Bonds account at

A) $100,000 with a Discount on Bond Investment of $3,000.
B) $100,000 with a Discount on Bond Investment of $2,925.
C) $96,925.
D) $97,000.
E) $97,075.

Question 23

Use the following information to answer questions
On July 1, 2010, L Co. purchased, as an investment, $100,000 of T Co.'s just-issued 10%, 20-year bonds payable. The bonds pay interest annually on June 30. L Co. intends to hold the bonds to maturity. L Co. uses the straight-line method to amortize and bond discounts or premiums.

-If L Co. paid $103,400 for the bonds, at December 31, 2010, L Co. will show its Investment in Bonds account at

A) $100,000 with a Premium on Bond Investment of $3,400.
B) $100,000 with a Discount on Bond Investment of $3,315.
C) $103,315.
D) $103,400.
E) $103,485.

Question 24

Pilgrim Incorporated reported $275,000 in taxable income for the year ended December 31, 2010. Corporate tax rates for 2010 were:

What is Pilgrim's total tax liability for 2010?

A) $ 68,750
B) $ 90,500
C) $ 93,500
D) $102,250
E) $107,250

Question 25

Jay Corp.'s income before income tax is $100,000 and taxable income is $85,000. Assuming a flat tax rate of 30%, Jay's income tax expense and income tax payable are what amounts?

Question 26

A temporary difference is caused by

A) inconsistencies between items that are taxable or tax deductible on the tax return versus items that are considered revenues or expenses on the income statement.
B) inconsistencies between items that are taxable or tax deductible on the income statement versus items that are considered revenues or expenses on the tax return.
C) not properly matching revenues and expenses on the income statement.
D) items that are never taxable or never deductible on the tax return versus items that considered revenues and expenses on the income statement.
E) both a and d are correct.

Question 27

In the first year of an asset's life, taking a larger depreciation deduction on the tax return than was taken as an expense on the income statement will cause tax expense to be

A) larger than tax payable and create a deferred tax asset.
B) larger than tax payable and create a deferred tax liability.
C) smaller than tax payable and create a deferred tax asset.
D) smaller than tax payable and create a deferred tax liability.
E) larger or smaller than tax payable, depending on the actual amounts involved.

Question 28

The following information is included in Tilden's 2010 income statement:
What is Tilden's 2010 income from continuing operations?

A) $128,000
B) $178,000
C) $208,000
D) $335,000
E) $338,000

Question 29

Information about discontinued operations is shown

A) in a single, net of tax amount after extraordinary items on the income statement.
B) in two net of tax amounts after extraordinary items on the income statement.
C) in a single, net of tax amount before extraordinary items on the income statement.
D) in two net of tax amounts before extraordinary items on the income statement.
E) as part of extraordinary items on the income statement.

Question 30

Which of the following events is an example of a discontinued operation?

A) The elimination of a major product line
B) The destruction of business property in Texas by a 100-year flood
C) The elimination of 70% of the labor force in a plant and installation of automated equipment to perform the same tasks
D) The sale of multiple machines located in a single plant location
E) All of the above

Question 31

The discontinued operations section on an income statement normally contains two items:

A) operating income (or loss) for the corporate entity and the cash provided from the sale of the segment assets.
B) operating income (or loss) for that business segment and the gain (or loss) resulting from the disposal of the segment.
C) non-operating income (or loss) for that business segment and the income taxes on the disposal of the segment.
D) net of tax extraordinary gain (or loss) on the disposal of the segment and the net of tax operating revenues of the discontinued segment.
E) temporary difference created by the sale of the segment and the net of tax gain or loss on the sale of the segment assets.

Question 32

Several businesses along the Mississippi Gulf Coast sustained damage from Hurricane Carmen. Prior to Hurricane Carmen, this area has sustained damage from several other hurricanes. How should these businesses classify their losses from Hurricane Carmen?

A) Operating income
B) Discontinued operations
C) Extraordinary item
D) Non-operating loss
E) Net of tax non-operating income

Question 33

An extraordinary item

Question 34

A major event not meeting one, but not all, of the criteria for an extraordinary item is often shown on the income statement as

A) a separate line item within the income from continuing operations section.
B) a separate net-of-tax line item within the income from continuing operations section.
C) part of the extraordinary items section but not net-of-tax.
D) part of discontinued operations if the event destroyed plant assets.
E) separately affecting tax expense and tax payable.

Question 35

International financial reporting standards

A) have stricter requirements than U.S. GAAP for determination of extraordinary items.
B) have weaker requirements than U.S. GAAP for determination of extraordinary items.
C) allow the reporting of extraordinary items only if a company has been profitable for five years.
D) do not allow an extraordinary items section on the income statement, but encourage such items to be shown in a separate footnote disclosure to the financial statements.
E) do not allow presentation or disclosure of extraordinary items in the financial statements.

Question 36

Kale Incorporated had 500,000 shares of common stock outstanding from January 1, 2010 through March 31, 2010. On April 1, 2010, Kale issued 500,000 more shares. On October 1, 2010, Kale issued an additional 1,200,000 shares. What was Kale's weighted average number of shares outstanding for 2010?

A) 733,333
B) 933,333
C) 1,175,000
D) 1,350,000
E) 2,200,000

Question 37

On the income statement, earnings per share is calculated for

Question 38

Investors are concerned with

Question 39

Which of the following items is not typically included in an annual report?

A) Financial Statement Highlights
B) Financial Statements and Accompanying Disclosures
C) Key Officers' Stock Purchases and Dispositions
D) Management's Discussion and Analysis
E) Independent Auditor's Report

Question 40

Financial statement analysis

A) is difficult for companies with multiple lines of business.
B) recognizes that historical information is a reliable predictor of future operations.
C) provides details about why operations are improving or deteriorating.
D) cannot be used for businesses that operate internationally.
E) all of the above are true.

Question 41

In trend analysis,

A) the selection of a base year is not necessary.
B) computer technology cannot be used.
C) charts and graphs will not be prepared to help interpret and analyze data.
D) relationships between financial statements components are highlighted.
E) nonmonetary information contained in the financial statement footnotes is irrelevant.

Question 42

An investment analyst has tracked the Really Big Corp.'s earnings before income taxes for the last 24-months in percentage terms and monitored significant variances. This type of analysis represents

A) trend analysis.
B) liquidity analysis.
C) a common-sized financial statement.
D) financial statement analysis.
E) a leverage ratio analysis.

Question 43

In analyzing common-sized financial statements,

A) unexpected changes or unusual relationships should be ignored.
B) comparisons between two or more companies are impossible because of the different sizes of the base numbers.
C) financial ratios will be equal to industry norms.
D) year-to-year comparisons cannot be made.
E) relationships between financial statement items and a constant base are calculated.

Question 44

Plumb Corporation expresses each income statement line item as a percentage of sales revenue. This type of analysis represents

A) trend analysis.
B) liquidity analysis.
C) common-sized financial statement.
D) financial leverage.
E) longitudinal ratio analysis.

Question 45

Use the following information to answer questions
Z Co. has total assets of $150,000, total stockholders' equity of $80,000, total annual revenues of $460,000, cost of goods sold of $290,000, and inventory of $30,000.

-In preparing common-sized statements for the year, which of the following percentages would represent cost of goods sold?

A) 10%
B) 52%
C) 63%
D) 193%
E) 363%

Question 46

Use the following information to answer questions
Z Co. has total assets of $150,000, total stockholders' equity of $80,000, total annual revenues of $460,000, cost of goods sold of $290,000, and inventory of $30,000.

-In preparing common-sized statements for the year, which of the following percentages would represent inventory?

A) 7%
B) 10%
C) 13%
D) 20%
E) 38%

Question 47

Use the following information to answer questions
Z Co. has total assets of $150,000, total stockholders' equity of $80,000, total annual revenues of $460,000, cost of goods sold of $290,000, and inventory of $30,000.

-In preparing common-sized statements for the year, which of the following percentages would represent total liabilities?

A) 15%
B) 30%
C) 47%
D) 88%
E) Cannot be computed from the information given

Question 48

Ratio analysis that involves comparing a company's financial ratios with those of competing companies and/or industry norms is called ____, while ratio analysis that focuses on changes in a firm's financial ratios over time is called ____.

A) cross-sectional; longitudinal
B) longitudinal; cross-sectional
C) common-sized; trend
D) longitudinal; liquidity
E) liquidity; longitudinal

Question 49

Ratios that focus on the ability of a firm to pay its upcoming debts are called

A) activity ratios.
B) financial leverage ratios.
C) liquidity ratios.
D) profitability ratios.
E) market strength ratios.

Question 50

Ratios that focus on the relationship between creditor and ownership equity in a firm are

A) activity ratios.
B) financial leverage ratios.
C) liquidity ratios.
D) profitability ratios.
E) market strength ratios.

Question 51

Ratios that focus on how quickly accounts receivable are being collected and inventory is being sold are called

A) activity ratios.
B) financial leverage ratios.
C) liquidity ratios.
D) profitability ratios.
E) market strength ratios.

Question 52

Profitability ratios are often calculated in relationship to

Question 53

Market strength ratios are

A) updated daily.
B) highly volatile.
C) influenced by investor perceptions.
D) may be unreliable if used without other information.
E) all of the above.

Question 54

A company's P/E ratio indicates

A) how much investors are willing to pay for each $ of a company's net assets.
B) how much investors are willing to pay for each $ of a company's earnings.
C) the ability of a company to generate profits from its asset base.
D) the relationship of a company's profits to its expenses.
E) none of the above.

Question 55

Which of the following items is a quick asset?

Question 56

Which of the following transactions would decrease a company's current ratio?

A) Selling goods to a customer on account
B) Receiving payment from a customer with an outstanding account receivable
C) Purchasing office supplies for cash
D) Refinancing a short-term liability with a long-term note payable
E) Using cash to settle a long-term liability

Question 57

The quick ratio relates which of the following to total current liabilities?

A) Cash and Receivables
B) Cash and Inventory.
C) Cash, Receivables, and Inventory,
D) Cash, Short-term Investments, and Receivables.
E) Cash, Short-term Investments, Receivables, and Inventory

Question 58

Use the following information to answer questions
The following asset and liability accounts are shown on Mason Store's December 31, 2010, balance sheet:


-What is Mason's current ratio at December 31, 2010?

A) 2.65
B) 2.85
C) 2.91
D) 3.64
E) 7.63

Question 59

Use the following information to answer questions
The following asset and liability accounts are shown on Mason Store's December 31, 2010, balance sheet:


-What is Mason's quick ratio at December 31, 2010?

A) 1.70
B) 2.00
C) 2.43
D) 2.50
E) 6.90

Question 60

Use the following information to answer questions
The following asset and liability accounts are shown on Mason Store's December 31, 2010, balance sheet:


-What is Mason's debt to total assets ratio at December 31, 2010?

A) 50.4%
B) 38.2%
C) 34.6%
D) 30.6%
E) 26.6%

Question 61

Use the following information to answer questions
The following asset and liability accounts are shown on Mason Store's December 31, 2010, balance sheet:


-What is Mason's long-term debt to stockholders' equity ratio at December 31, 2010?

A)18.7%
B) 46.7%
C) 56.1%
D) 61.7%
E) Cannot be calculated from the information given

Question 62

A bondholder of a corporation would prefer which of the following items to increase?

A) Long-term debt to equity ratio
B) Debt to total assets ratio
C) Times-interest-earned ratio
D) Cost of goods sold to net sales
E) Average age of inventory

Question 63

The following information is from Clean & Green's 2010 financial statements:
What is Clean & Green's times-interest-earned ratio at December 31, 2010?

A) 2.00
B) 6.00
C) 7.00
D) 8.60
E) 9.60

Question 64

Use the following information to answer questions
Joliet's 2009 and 2010 financial statements included the following data:

Assume a 360-day year for all calculations.

-What is Joliet's accounts receivable turnover ratio for 2010?

A) 8.8
B) 10.5
C) 11.0
D) 13.3
E) 14.0

Question 65

Use the following information to answer questions
Joliet's 2009 and 2010 financial statements included the following data:

Assume a 360-day year for all calculations.

-What is average age of Joliet's accounts receivable for 2010?

A) 25.7 days
B) 27.1 days
C) 32.7 days
D) 34.3 days
E) 40.9 days

Question 66

Use the following information to answer questions
Joliet's 2009 and 2010 financial statements included the following data:

Assume a 360-day year for all calculations.

-What is Joliet's inventory turnover ratio for 2010?

A) 7.00
B) 7.69
C) 8.12
D) 8.67
E) 8.70

Question 67

Use the following information to answer questions
Joliet's 2009 and 2010 financial statements included the following data:

Assume a 360-day year for all calculations.

-What is average age of Joliet's inventory for 2010?

A) 41.4 days
B) 41.5 days
C) 44.3 days
D) 46.8 days
E) 51.4 days

Question 68

What is Joliet's total asset turnover ratio for 2010?

A) 0.43
B) 0.77
C) 2.30
D) 2.41
E) 2.51

Question 69

What is Joliet's gross profit percentage for 2010?

A) 31.8%
B) 33.3%
C) 46.7%
D) 79.7%
E) none of the above

Question 70

A company's profit margin percentage would be increased if the company

A) understated accrued revenue.
B) overstated cost of goods sold.
C) experienced a significant increase in interest expense.
D) changed from double-declining balance depreciation to straight-line depreciation.
E) experienced a extraordinary loss on the sale of land.

Question 71

A company's return on assets would be increased if the company

A) recognized an extraordinary loss.
B) bought additional assets.
C) purchased shares of outstanding common stock for cash from shareholders.
D) experienced a 25% increase in cost of goods sold.
E) issued an additional $1,000,000 in bonds payable.

Question 72

The degree of correlation between a firm's economic income and its reported earnings determined by GAAP is the company's

A) book value.
B) comprehensive income.
C) earnings quality.
D) fair market value.
E) stock price.

Question 73

In assessing the quality of a firm's reported earnings, one should not

A) compare accounting principles employed by the firm to those used by competitors.
B) exclude qualitative information reported by the media about a particular company's operations.
C) read the footnotes to the financial statements.
D) review extraordinary losses included in the income statement.
E) attempt to determine whether there are any significant expenses not reflected in the income statement.M/C Answers

Question 74

Another name for the income statement is the statement of operations.

Question 75

When a company uses the cost method of accounting for a long-term investment, any difference between the year-end carrying value and market value of the investment is recorded in an unrealized gain or loss account on the balance sheet.

Question 76

Cash dividends increase the Investment account when a company uses the equity method of accounting for investments.

Question 77

Under the equity method of accounting for an investment, a year-end decrease in the market value of the shares of the investment is shown as an unrealized loss on the income statement of the investing company.

Question 78

Not all companies using the equity method of accounting for an investment will consolidate the financial statements of investees at year-end.

Question 79

When a company owns more than 50% of another company, financial statements of the two entities will generally be consolidated at year-end.

Question 80

Minority interest should be shown as a liability on the balance sheet.