Deck 10: Using Financial Statement Analysis to Evaluate Firm Performance

Question 1

The FASB requires that ________ and ________ need to be separated from the regular earnings of a business.

A)other revenues and expenses; extraordinary items
B)discontinued operations; other revenues and expenses
C)extraordinary items; discontinued operations
D)extraordinary items; changes in accounting principle

Answer 1

C

Question 2

When a company disposes of a segment of a business,the resulting gain or loss on disposal is reported as part of ________.

A)discontinued operations
B)extraordinary items
C)other revenues and expenses
D)changes in continuing operations

Answer 2

A

Question 3

The financial statements used to analyze companies include all of these statements EXCEPT the ________.

A)balance sheet
B)income statement
C)statement of cash flows
D)statement of shareholders' rights

Answer 3

D

Question 4

Which of the following items affects total shareholders' equity without being reported on the income statement?

A)purchase of treasury stock
B)extraordinary items
C)discontinued operations
D)repayment of long-term debt

Question 5

Items that are both unusual in nature and infrequent in occurrence are considered ________.

A)discontinued operations
B)extraordinary items
C)items of other revenues and expenses
D)changes in continuing operations

Question 6

Team Shirts sold its surfboard operations for $125,000 and incurred a loss of $47,000 on the sale.This loss would be reported on the income statement as part of ________.

A)discontinued operations
B)extraordinary items
C)other revenues and expenses
D)income from continuing operations

Question 7

When a company disposes of a segment of a business,this year's operating income or loss from the segment is reported as part of ________.

A)discontinued operations
B)extraordinary items
C)other revenues and expenses
D)changes in continuing operations

Question 8

A tornado in New York City caused $48,000 worth of damage to Out of Africa's store and merchandise.The insurance company paid the business $50,000.The $2,000 gain would be reported on the income statement as part of ________.

A)discontinued operations
B)extraordinary items
C)other revenues and expenses
D)continuing operations

Question 9

A gain or loss from discontinued operations is treated on the income statement as a ________.

A)part of regular income from operations for the period
B)separate line item called other revenues and expenses
C)separate line item before taxes
D)separate line item net of taxes

Question 10

Lee's Lions had to shut down its store in Houston on July 31.This year's operating income or loss from the store before July 31 would be reported on the income statement as part of ________.

A)discontinued operations
B)extraordinary items
C)other revenues and expenses
D)income from continuing operations

Question 11

Extraordinary items need to be treated separately from regular business operations on the ________.

A)balance sheet
B)income statement
C)statement of cash flows
D)statement of changes in shareholders' equity

Question 12

Generally accepted accounting principles require that discontinued operations be reported as ________.

A)part of regular operations
B)a before-tax line item separate from continuing operations
C)an after-tax line item separate from continuing operations
D)an extraordinary item

Question 13

Hurricane Octavio caused $14,500 worth of damage to a warehouse in Idaho owned by Team Shirts.This loss would be reported on the income statement as part of ________.

A)discontinued operations
B)extraordinary items
C)depreciation expense
D)income from continuing operations

Question 14

On June 1,Team Shirts sold its surfboard operations and incurred a loss on the sale.This year's operating income or loss from surfboard operations before June 1 would be reported on the income statement as part of ________.

A)discontinued operations
B)extraordinary items
C)other revenues and expenses
D)income from continuing operations

Question 15

Hurricane Octavio caused $14,500 worth of damage to a warehouse in Miami owned by Team Shirts.This loss would be reported on the income statement as part of ________.

A)discontinued operations
B)extraordinary items
C)depreciation expense
D)income from continuing operations

Question 16

Which of the following items affects retained earnings but does not affect net income?

A)extraordinary items
B)declaring dividends
C)issuing stock
D)discontinued operations

Question 17

Discontinued operations need to be treated separately from regular business operations on the ________.

A)balance sheet
B)income statement
C)statement of cash flows
D)statement of financial position

Question 18

Lee's Lions had to shut down its store in Houston.There was no buyer,so Lee's Lions sold the store equipment and closed out the business at a loss.This loss would be reported on the income statement as part of ________.

A)continuing operations
B)discontinued operations
C)extraordinary items
D)other revenues and expenses

Question 19

Team Shirts sold its surfboard operations for $125,000 and made a profit of $12,000 on the sale.This gain would be reported on the income statement as part of ________.

A)discontinued operations
B)extraordinary items
C)other revenues and expenses
D)continuing operations

Question 20

Extraordinary items are reported on the income statement as ________.

A)part of income from continuing operations
B)separate line items that are part of any discontinued operations
C)separate line items after income from continuing operations and after any discontinued operations
D)items of other revenues and expenses

Question 21

A loss from a hurricane in Florida could be classified as an extraordinary item.

Question 22

Which of the following items affects total shareholders' equity without being reported on the income statement?

A)discontinued operations
B)extraordinary items
C)sale of common stock at a price above par
D)purchase of property,plant and equipment in exchange for a long-term note

Question 23

Acme,Inc.has been profitable since its first day of operations,until the recent economic downturn.This year,for the first time in fifty years,Acme has expenses that are greater than its revenues.This loss should be reported on Acme's income statement as ________.

A)an operating loss
B)an extraordinary loss
C)a loss from discontinued operations
D)a non-recurring loss

Question 24

Discontinuing a particular business segment is a non-recurring event,so this item should be reported separately on the income statement.

Question 25

A loss from a plane crash could be classified as an extraordinary item by an airline.

Question 26

The FASB has defined two items that need to be separated from the regular earnings of a business and reported net of taxes: discontinued operations and extraordinary items.

Question 27

Any part of a company that is sold off or otherwise eliminated is referred to as discontinued operations.

Question 28

Discontinuing a business segment is considered part of normal business operations.

Question 29

Earnings,or net income,are important because they are used to evaluate the performance of a firm and to predict its future performance.

Question 30

What items are shown separately from income from operations on the income statement?

Question 31

The FASB has defined three items that need to be separated from the regular earnings of a business: discontinued operations,other income and expenses,and extraordinary items.

Question 32

Which of these could a retailing business in the Midwest classify as an extraordinary item?

A)a loss from employee embezzlement
B)a loss from a lower-of-cost-or market inventory write-down
C)a loss from selling a delivery truck at less than its book value
D)none of these are extraordinary items

Question 33

A loss from embezzlement by an employee could be classified as an extraordinary item.

Question 34

A manufacturer could classify a loss from a plane crashing into its factory building as an extraordinary item.

Question 35

Events that are both unusual in nature and frequent in occurrence are considered extraordinary items.

Question 36

A loss from a tornado in Kansas could be classified as an extraordinary item.

Question 37

A loss from a tsunami in Kansas could be classified as an extraordinary item.

Question 38

Discontinuing a particular business segment is a non-recurring event,so it should be classified as an extraordinary item on the income statement.

Question 39

Earnings,or net income,is the focus of financial reporting.

Question 40

A takeover of a business segment by a foreign government could be classified as an extraordinary item.

Question 41

Ahram's Imports had an entire shipping container of oriental rugs seized by the government of Afghanistan in 2011.The insurance company refused to pay the estimated loss of $500,000,since it was caused by an "act of war." The loss will reduce Ahram's income taxes by $70,000.
Required: Show how these amounts would be reported on Ahram's income statement for the year ended December 31,2011.

Question 42

A technique for evaluating items on a single financial statement is called ________ analysis.

A)horizontal
B)vertical
C)financial statement
D)time-series

Question 43

Refer to the EZ Electronics annual report above.Using horizontal analysis with 2010 as the base year,2011 cost of goods sold would be represented as ________.

A)113%
B)133%
C)13%
D)33%

Question 44

In 2011,Bebe's Baby Boutique shut down its store in Paris.Operating losses for the year were $114,000,after a tax savings of $28,000.The store's furnishings and equipment were sold at a loss of $175,000,which was partially offset by a tax savings of $25,000.
Required: Show how these amounts would be reported on Bebe's income statement for the year ended December 31,2011.

Question 45

Refer to the EZ Electronics annual report above.Using horizontal analysis with 2010 as the base year,2012 operating expenses would be represented as ________.

A)20%
B)120%
C)40%
D)48%

Question 46

Refer to the EZ Electronics annual report above.Using horizontal analysis with 2010 as the base year,2012 sales would be represented as ________.

A)20%.
B)9%.
C)109%.
D)120%.

Question 47

Why must discontinued operations and extraordinary items be reported separately from income from operations on the income statement?

Question 48

Refer to the EZ Electronics annual report above.Using horizontal analysis with 2010 as the base year,2011 Sales would be represented as ________.

A)100%
B)10%
C)110%
D)120%

Question 49

In vertical analysis,all items on this year's income statement would be divided by ________.

A)total assets
B)net income
C)this year's sales
D)sales for the base year

Question 50

Refer to the EZ Electronics annual report above.Using horizontal analysis with 2010 as the base year,2012 gross profit would be represented as ________.

A)114%
B)14%
C)67%
D)80%

Question 51

Refer to the EZ Electronics annual report above.This information is from EZ Electronics' ________.

A)income statement
B)balance sheet
C)statement of cash flows
D)statement of changes in shareholders' equity

Question 52

Marcy owned a small café and a catering business.Both the café and catering business were properly combined on the financial statements that were provided to the bank and to investors.The catering business is outperforming the café,so Marcy plans to sell the café and concentrate on the catering business.Her accountant has told her that her income statement will be different this year because she is selling the café.Explain to Marcy why the income statement for her business operations has to be different this year.

Question 53

In 2011,a flash flood in Death Valley destroyed Desert Dave's Watering Hole and its entire inventory.Net losses after insurance payments came to $34,000.The Watering Hole was able to claim a casualty loss on its tax return and got a tax reduction of $12,000.
Required: Show how these amounts would be reported on the Watering Hole's income statement for the year ended December 31,2011.

Question 54

Refer to the EZ Electronics annual report above.Using horizontal analysis with 2010 as the base year,2011 operating expenses would be represented as ________.

A)38%
B)105%
C)5%
D)40%

Question 55

A technique for evaluating a series of financial statement data over a period of time is called ________ analysis.

A)horizontal
B)vertical
C)financial statement
D)over-time

Question 56

Refer to the EZ Electronics annual report above.Using horizontal analysis with 2010 as the base year,2011 gross profit would be represented as ________.

A)109%
B)9%
C)69%
D)169%

Question 57

In 2011,Axle Corporation sold its computer software division to Slight Technology.During the year of the sale,the division generated a profit of $425,000 before taxes and paid $183,750 in taxes.The division was sold for $4,000,000 more than its book value and the taxes on this gain were $870,000.
Required: Show how these amounts would be reported on Axle's income statement for the year ended December 31,2011.

Question 58

Refer to the EZ Electronics annual report above.Using horizontal analysis with 2010 as the base year,2012 cost of goods sold would be represented as ________.

A)118%
B)133%
C)18%
D)33%

Question 59

What is treated as an extraordinary item on an income statement?

Question 60

Put an X in the appropriate box to show where each of the following items would be reported on the income statement.

Question 61

Refer to the Ace Electronics annual report above.Using horizontal analysis with 2010 as the base year,2012 Cost of goods sold would be represented as ________.

A)24%
B)20%
C)29%
D)25%

Question 62

Refer to the Ace Electronics annual report above.Using horizontal analysis with 2010 as the base year,2011 Gross profit would be represented as ________.

A)116%
B)86%
C)14%
D)17%

Question 63

Refer to the Ace Electronics annual report above.Using vertical analysis,2011 Sales would be represented as ________.

A)89%
B)12%
C)112%
D)100%

Question 64

Refer to the Ace Electronics annual report above.Using horizontal analysis with 2010 as the base year,2012 Gross profit would be represented as ________.

A)88%
B)12%
C)(3%)
D)13%

Question 65

Refer to the Ace Electronics annual report above.Using vertical analysis,2012 Gross profit would be represented as ________.

A)113%
B)68%
C)(3%)
D)58%

Question 66

Refer to the EZ Electronics annual report above.Using horizontal analysis with 2010 as the base year,2012 income before taxes would be represented as ________.

A)27%
B)127%
C)107%
D)7%

Question 67

Refer to the Ace Electronics annual report above.Using horizontal analysis with 2010 as the base year,2012 Operating expenses would be represented as ________.

A)10%
B)11%
C)20%
D)25%

Question 68

Refer to the EZ Electronics annual report above.Using horizontal analysis with 2010 as the base year,2011 net income would be represented as ________.

A)12%.
B)13%.
C)113%.
D)22%.

Question 69

Refer to the Ace Electronics annual report above.Using vertical analysis,2012 Sales would be represented as ________.

A)5%
B)105%
C)118%
D)100%

Question 70

Refer to the Ace Electronics annual report above.Using horizontal analysis with 2010 as the base year,2011 Operating expenses would be represented as ________.

A)113%
B)89%
C)11%
D)13%

Question 71

Refer to the Ace Electronics annual report above.Using vertical analysis,2011 Cost of goods sold would be represented as ________.

A)267%
B)105%
C)42%
D)38%

Question 72

Refer to the Ace Electronics annual report above.Using horizontal analysis with 2010 as the base year,2011 Sales would be represented as ________.

A)112%
B)12%
C)11%
D)1)12%

Question 73

Refer to the Ace Electronics annual report above.Using vertical analysis,2011 Gross profit would be represented as ________.

A)70%
B)14%
C)17%
D)63%

Question 74

Refer to the Ace Electronics annual report above.Using vertical analysis,2012 Cost of goods sold would be represented as ________.

A)16%
B)119%
C)125%
D)42%

Question 75

Refer to the Ace Electronics annual report above.Using horizontal analysis with 2010 as the base year,2011 Net income would be represented as ________.

A)36%
B)22%
C)20%
D)25%

Question 76

Refer to the Ace Electronics annual report above.Using horizontal analysis with 2010 as the base year,2011 Cost of goods sold would be represented as ________.

A)105%
B)38%
C)6%
D)5%

Question 77

Refer to the EZ Electronics annual report above.Using horizontal analysis with 2010 as the base year,2012 net income would be represented as ________.

A)(6%)
B)(1%)
C)7%
D)19%

Question 78

Refer to the Ace Electronics annual report above.Using horizontal analysis with 2010 as the base year,2012 Net income would be represented as ________.

A)90%
B)15%
C)(11)%
D)(10)%

Question 79

Refer to the EZ Electronics annual report above.Using horizontal analysis with 2010 as the base year,2011 income before taxes would be represented as ________.

A)13%
B)105%
C)31%
D)131%

Question 80

Refer to the Ace Electronics annual report above.Using horizontal analysis with 2010 as the base year,2012 Sales would be represented as ________.

A)118%
B)18%
C)6%
D)5%