Deck 11: The Income Statement the Statement of Stockholders Equity

Question 1

Ongoing expenses incurred by the entity, other than direct expenses for merchandise and other costs directly related to sales, are called:

A)cost of goods sold.
B)extraordinary items.
C)operating expenses.
D)other expenses.

Answer 1

C

Question 2

Steadily decreasing cost of goods sold as a percentage of net sales is a sign of:

A)decreasing earnings quality.
B)increasing earnings quality.
C)earnings quality remaining the same.
D)none of the above.

Answer 2

B

Question 3

Each identifiable part of a company is called a business segment.

Answer 3

True

Question 4

In order to recognize revenue:

A)the seller must deliver the product or service to the customer.
B)the customer must take possession and ownership of the product or service.
C)the seller must either collect the cash or be reasonably assured of collecting the cash in the near future.
D)all of the above must occur.

Question 5

"Top line" decline means that cost of goods sold is declining.

Question 6

Components of earnings quality include:

A)proper revenue and expense recognition.
B)low operating expenses compared to sales.
C)high and improving gross margin.
D)all of the above.

Question 7

Most financial statement frauds recognize revenues later than they should be recognized and expenses before they should be recognized.

Question 8

The value of a company's stock can be estimated by dividing the company's current year estimated annual income by the investment capitalization rate.

Question 9

Financial statement fraud can include the improper recognition of expenses.

Question 10

Roughly half of all financial statement frauds over the past two decades have involved:

A)improper depreciation methods.
B)improper expense recognition.
C)improper revenue recognition.
D)discontinued operations.

Question 11

The characteristic of an earnings number that makes it most useful for decision making is called:

A)comprehensive income.
B)clean opinion.
C)earnings quality.
D)extraordinary item.

Question 12

Revenue frauds include:

A)channel stuffing.
B)sales to nonexistent customers.
C)reporting revenue when goods have not yet been delivered.
D)all of the above.

Question 13

To estimate the value of a company's common stock, financial analysts determine the present value of the company's stream of future income.

Question 14

A type of financial statement fraud that is accomplished by shipping more to customers than they ordered, with the expectation that they may return some or all of it is called:

A)fictitious sales.
B)earnings quality.
C)channel stuffing.
D)improper expense recognition.

Question 15

Under the accrual method of accounting, a retail store recognizes revenue at the time the customers receive and pay for the merchandise.

Question 16

U.S. GAAP and IFRS always have the same revenue recognition criteria.

Question 17

The higher the risk of the investment, the higher the investment capitalization rate.

Question 18

The purpose of channel stuffing is to decrease operating expenses.

Question 19

The degree to which earnings are an accurate reflection of underlying economic events for both revenues and expenses, and the extent to which earnings from a company's core operations are improving over time, is:

A)comprehensive income.
B)discontinued operations.
C)earnings quality.
D)revenue recognition.

Question 20

Companies will recognize revenues earlier than required by GAAP to meet company sales targets which are often tied to executive bonuses.

Question 21

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

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

Question 22

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 23

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

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

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

Question 28

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

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

Question 29

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

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

Question 30

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

A)to hold the company's stock.
B)to buy 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 31

Changes in accounting estimates:

A)are reported for the current and future periods on the new basis.
B)require prior financial statements to be restated.
C)are not allowed under GAAP.
D)are a prior period adjustment.

Question 32

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 a prior-period adjustment.
C)an extraordinary item.
D)other gains and losses.

Question 33

Changes in accounting principles:

A)are reported for the current and future periods on the new basis.
B)require the company to retrospectively restate all prior-period amounts presented for comparative purposes.
C)are not allowed under GAAP.
D)are shown on the balance sheet.

Question 34

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

A)on the balance sheet net of the income tax consequences.
B)on the income statement net of the income tax consequences.
C)as part of other comprehensive income.
D)as part of extraordinary items.

Question 35

Extraordinary items:

A)are treated the same under IFRS and GAAP.
B)include a loss from a lawsuit.
C)include the expropriation of a company's assets by a foreign government.
D)include a loss from the sale of plant assets.

Question 36

Which of the following should probably be included when estimating future earnings?

A)Income from continuing operations
B)Gain on sale of business segment
C)Loss due to natural disaster
D)Both A and B

Question 37

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)buy the stock.
C)hold the stock.
D)obtain additional information before making a decision.

Question 38

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

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

Question 39

Accounting changes:

A)can be a way for a company to create profits when the company can't earn enough from continuing operations.
B)must be disclosed, including their effects on earnings.
C)are allowed under GAAP if there is a valid reason for the change.
D)include all of the above.

Question 40

The earnings rate used to estimate the value of an investment in stock is the:

A)investment rate.
B)market rate.
C)stated rate.
D)investment capitalization rate.

Question 41

The existence of the Deferred Tax Liability account indicates that the company lacked sufficient cash to pay its tax bill.

Question 42

Earnings per share is computed for which of the following?

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

Question 43

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

Question 44

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

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

Question 45

The amount of a company's net income per share of its outstanding common stock is:

A)earnings per share.
B)comprehensive income per share.
C)income per share
D)taxable income per share.

Question 46

Deferred tax liability is computed by multiplying taxable income by the income tax rate.

Question 47

If a company records a revenue or expense incorrectly, and the error is not corrected until a later period, the balance of Retained earnings is wrong until the error is corrected.

Question 48

Earnings per share (EPS)is calculated as:

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

Question 49

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

A)An EPS figure should be calculated and presented for each significant element of net income on the income statement.
B)EPS is based on the weighted-average shares of preferred stock outstanding for an accounting period.
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.

Question 50

When computing earnings per share, preferred dividends are:

A)subtracted from 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)added to common shares in the denominator of the EPS calculation.

Question 51

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

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

Question 52

Companies with a complex capital structure report:

A)basic EPS.
B)diluted EPS.
C)both A and B.
D)none of the above.

Question 53

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)$6.67.
B)$7.05.
C)$7.20.
D)$9.60.

Question 54

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

Question 55

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

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

Question 56

Items appear on the income statement in which order?

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

Question 57

Corporations generally credit Income Tax Payable based on the amount of pretax accounting income multiplied by the income tax rate.

Question 58

When computing earnings per share, preferred dividends are:

A)subtracted from net income and discontinued operations.
B)subtracted from net income.
C)added to net income.
D)added to net income and discontinued operations.

Question 59

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

Question 60

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

Question 61

For most companies, tax expense equals tax payable.

Question 62

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

Question 63

The amount of tax to pay the government in the next period is known as:

A)income tax expense.
B)income tax payable.
C)deferred tax asset.
D)deferred tax liability.

Question 64

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

Question 65

Pretax accounting income is found on the:

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

Question 66

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

Question 67

Taxable income is found on the:

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

Question 68

The income tax return is prepared in accordance with GAAP.

Question 69

Which of the following statements is TRUE?

A)The income tax return and the financial statements are the same documents.
B)The income tax return is prepared using GAAP.
C)The income tax return is prepared using rules set by the IRS.
D)Taxable income is found on the income statement.

Question 70

Income tax payable appears on the:

A)income statement.
B)tax return.
C)balance sheet.
D)statement of stockholders' equity.

Question 71

If income tax expense and income tax payable are the same amount, the journal entry to record the expense is:

A)debit income tax payable and credit income tax expense.
B)debit income tax expense and credit deferred tax liability.
C)debit income tax expense and credit income tax payable.
D)debit deferred tax liability and credit income tax expense.

Question 72

The formula to determine income tax payable is:

A)income before income tax expense (from the income tax return)multiplied by the income tax rate.
B)income before income tax expense (from the income statement)multiplied by the income tax rate.
C)taxable income (from the income tax return)multiplied by the income tax rate.
D)taxable income (from the income statement)multiplied by the income tax rate.

Question 73

For any given year, Income Tax Payable can never exceed Income Tax Expense.

Question 74

Income tax expense helps measure net income.

Question 75

When pretax accounting income exceeds taxable income:

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

Question 76

The basis for computing the amount of tax to pay the government is:

A)pretax accounting income.
B)taxable income.
C)comprehensive income.
D)net income.

Question 77

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

Question 78

The formula to determine income tax expense is:

A)income before income tax expense (from the tax return)multiplied by the income tax rate.
B)income before income tax expense (from the income statement)multiplied by the income tax rate.
C)taxable income (from the income tax return)multiplied by the income tax rate.
D)taxable income (from the income statement)multiplied by the income tax rate.

Question 79

Income before tax on the income statement is:

A)income tax payable.
B)net income.
C)pretax accounting income.
D)taxable income.

Question 80

Income tax expense appears on the:

A)income statement.
B)tax return.
C)balance sheet.
D)statement of stockholders' equity.