Deck 11: The Income Statement, the Statement of Comprehensive Income, the Statement of Stockholders Equity

Question 1

Gross profit measures the overall profitability of a company.

Answer 1

False

Question 2

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

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

Answer 2

D

Question 3

U.S. GAAP and IFRS do not have the same revenue recognition criteria.

Answer 3

True

Question 4

Sales revenue less cost of goods sold is called:

A) gross profit.
B) net income.
C) net profit.
D) net sales.

Question 5

If net sales are $1,200,000 and cost of goods sold are $300,000, gross profit is $900,000.

Question 6

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 the items is called:

A) improper shipping recognition.
B) improper sales recognition.
C) channel stuffing.
D) accidental shipping.

Question 7

Financial statement fraud does not include the improper recognition of expenses.

Question 8

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

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

Question 9

The operating expense section of an income statement would NOT include:

A) salaries expense.
B) utilities expense.
C) supplies expense.
D) interest expense.

Question 10

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

A) increasing earnings quality.
B) decreasing earnings quality.
C) lower sales.
D) higher sales.

Question 11

If ABC Corporation has net sales of $600,000 and cost of goods sold of $390,000, the gross profit percentage is:

A) 65%.
B) 54%.
C) 35%.
D) 25%.

Question 12

There will be income from operations if:

A) revenues are greater than cost of goods sold.
B) revenues are greater than operating expenses.
C) gross profit is greater than operating expenses.
D) cost of goods sold is greater than operating expenses.

Question 13

The purpose of channel stuffing is to increase operating expenses.

Question 14

Revenue fraud includes all of the following EXCEPT:

A) reporting revenue when goods have not yet been delivered.
B) channel stuffing.
C) sales to nonexistent customers.
D) recognizing revenue when earned.

Question 15

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

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

Question 16

The revenue recognition principle requires that sales revenues be recognized when they are earned.

Question 17

The gross profit rate is computed by dividing gross profit by:

A) cost of goods sold.
B) net sales.
C) net income.
D) operating expenses.

Question 18

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

Question 19

Recognizing revenue before it is earned is a major source of financial statement fraud.

Question 20

Gross profit is calculated by dividing cost of goods sold by net sales.

Question 21

Income tax expense helps measure income from operations.

Question 22

On August 1, Central Computers, Inc. purchased thirty computer chips, on account, from a company located in Taiwan for 500,000 Taiwan dollars. On that date the Taiwan dollar is worth $0.040. On September 1, when the Taiwan dollar was worth $0.038, payment was made. The journal entry to record the payment on September 1 would include a:

A) debit to Accounts Payable $19,000.
B) debit to Foreign-Currency Transaction Loss $1,000.
C) credit to Foreign-Currency Transaction Gain $1,000.
D) credit to Cash $20,000.

Question 23

Hedging enables an entity to protect itself from losing money in a foreign transaction by engaging in a counterbalancing transaction.

Question 24

Common stock should be purchased if the estimated value of a company exceeds its current market value.

Question 25

The foreign-currency transaction gain account holds gains and losses on transactions settled in a foreign currency.

Question 26

On June 15, Central Computers, Inc. sold twenty-five computers, on account, to a company located in Argentina for 3,000,000 pesos. On that date the peso is worth $0.079. On July 15, when the peso was worth $0.070, payment was received. The journal entry to record the July 15 collection on account would include a:

A) credit to Cash $237,000
B) credit to Accounts Receivable $210,000.
C) debit to Foreign-Currency Transaction Loss $27,000.
D) credit to Sales $210,000.

Question 27

Operating income includes income from discontinued operations.

Question 28

Income tax payable is the amount of tax to be paid to the government in the next period.

Question 29

In a foreign-currency transaction, all funds must be converted to U.S. dollars for reporting purposes.

Question 30

When a company discontinues a segment of its business, the income statement should report income (loss) from continuing operations and income (loss) from discontinued operations.

Question 31

Foreign-currency transaction losses can be avoided if international transactions are settled in U.S. dollars.

Question 32

Shown below is a partial consolidated income statement for B&B Brothers, Inc. for 2011 and 2012.
Required: Calculate the missing amounts (a through d) using the information below.

Question 33

On August 1, Central Computers, Inc. purchased thirty computer chips, on account, from a company located in Taiwan for 500,000 Taiwan dollars. On that date the Taiwan dollar is worth $0.040. On September 1, when the Taiwan dollar was worth $0.038, payment was made. The journal entry to record the sale on August 1 would include a:

A) credit to Accounts Payable $19,000.
B) credit to Accounts Payable $20,000.
C) credit to Foreign-Currency Transaction Gain $1,000.
D) credit to Cash $20,000.

Question 34

All foreign transactions will result in a foreign-currency exchange rate gain or loss.

Question 35

One reason why taxable income and accounting income may not match is due to the difference in depreciation methods.

Question 36

On June 15, Central Computers, Inc. sold twenty-five computers on account to a company located in Argentina for 3,000,000 pesos. On that date, the peso is worth $0.079. On July 15, when the peso was worth $0.070, payment was received. The journal entry to record the sale on June 15 would include a:

A) debit to Accounts Receivable $237,000
B) debit to Accounts Receivable $210,000.
C) debit to Foreign-Currency Transaction Loss $27,000.
D) credit to Sales $210,000.

Question 37

Income tax payable is computed by multiplying income before income taxes per the income statement by the income tax rate.

Question 38

The net of foreign-currency transaction gains and losses will appear on the balance sheet.

Question 39

Components of earnings quality include all of the following EXCEPT:

A) low operating expenses compared to sales.
B) high and improving gross margin.
C) a low gross profit.
D) proper revenue and expense recognition.

Question 40

Taxable income should always match accounting income.

Question 41

The loss incurred as a result of writing down obsolete inventory should be reported as:

A) part of discontinued operations.
B) an operating expense.
C) other expenses and losses.
D) an extraordinary item.

Question 42

Current earnings per share information is as follows: The interest capitalization rate is 7.5%. How much should an investor pay for a share of stock?

A) $50.00
B) $58.00
C) $64.00
D) $70.00

Question 43

Extraordinary gains and losses are shown "net of tax" on the income statement.

Question 44

Western Corporation has taxable income of $390,000 and pretax accounting income of $363,000. The company's income tax rate is 35%. The entry to record the income tax includes a:

A) debit to Income Tax Expense $136,500.
B) debit to Deferred Tax Asset $127,050.
C) debit to Deferred Tax Asset $9,450.
D) credit to Income Tax Payable $127,050.

Question 45

The discontinued operations section of the income statement refers to the:

A) loss on products that did not sell.
B) discontinuance of a product line.
C) disposal of out of date equipment.
D) disposal of a segment of a business.

Question 46

When pretax accounting income exceeds taxable income:

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

Question 47

Income tax expense appears on the:

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

Question 48

An event or transaction should be considered as an extraordinary item if it is unusual in nature and if it occurs infrequently.

Question 49

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

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

Question 50

Southern Corporation has pretax accounting income of $575,000 and taxable income of $560,000. The company's income tax rate is 35%. The entry to record the income tax includes a:

A) debit to Deferred Tax Asset $5,250.
B) debit to Deferred Tax Asset $196,000.
C) credit to Deferred Tax Liability $5,250.
D) credit to Deferred Tax Liability $196,000.

Question 51

The following items are extraordinary items EXCEPT:

A) newly enacted laws.
B) natural disasters.
C) expropriation of company assets by a foreign government.
D) losses on a failing product line.

Question 52

The formula to determine income tax expense is:

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

Question 53

Which of the following statements is true?

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

Question 54

Which of the following would be considered an extraordinary item?

A) Losses from a labor dispute
B) Losses from a natural disaster
C) Writing-down inventory to lower-of-cost or market
D) Losses from the sale of property

Question 55

The formula to determine income tax payable is:

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

Question 56

The disposal of a segment of a business is called:

A) an extraordinary item.
B) other expense.
C) a sales transaction.
D) discontinued operations.

Question 57

Income tax payable appears on the:

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

Question 58

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

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

Question 59

The estimated value of a company's stock is less than the current market value of the company. The appropriate investment decision should be to:

A) buy the company's stock.
B) hold the company's stock.
C) sell the company's stock.
D) purchase the bond's that the company has issued.

Question 60

Charming Charlie's, Inc. is going to discontinue one of its manufacturing divisions. At the time of discontinuance, the division's assets with a book value of $1,000,000 are sold for $750,000 and operating income amounted to $145,000. Ignoring income taxes, what total amount should be reported on the income statement as discontinued operations?

A) $105,000 loss
B) $250,000 loss
C) $395,000 loss
D) $145,000 gain

Question 61

An extraordinary item is:

A) both infrequent and unusual for the company.
B) unusual for the company.
C) Infrequent for the company.
D) material with respect to the business and infrequent.

Question 62

Earnings per share shows how much income a company earned for each share of stock.

Question 63

Earnings per share is calculated:

A) only for preferred stock.
B) only for common stock.
C) for common and preferred stock.
D) only for treasury stock.

Question 64

A correction in income of a prior-period requires a debit to the Retained Earnings account.

Question 65

Prepare a partial income statement starting with income before income taxes with the information below for Sawyer Corporation for the year ending December 31, 2012. The tax rate for Sawyer Corporation is 35%:

Question 66

Prior-period adjustments appear on the statement of retained earnings.

Question 67

When a change in accounting principle occurs, the:

A) cumulative effect of the change should be reported in the current year's retained earnings statement.
B) change should be reported retroactively.
C) old accounting principle should be used for the current year.
D) new accounting principle should be used starting in the current year, with no change to the prior years.

Question 68

All of the following are true regarding changes in accounting principles EXCEPT:

A) Accounting changes are allowed when new principles are preferred over previous ones.
B) The company retrospectively restates all prior-period amounts as though the new accounting method had been in effect all along.
C) The majority of the changes in accounting principles are reported in the current period when the change in principle occurred.
D) If an accounting change impacts periods prior to the earliest one presented in the current income statement, an adjustment to retained earnings must be made.

Question 69

The income statement provides better information about a company than the statement of cash flows.

Question 70

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

A) net income per share.
B) gross profit per share.
C) earnings per share.
D) taxable income per share.

Question 71

Extraordinary items:

A) include the expropriation of a company's assets by a foreign government.
B) include the loss from the sale or exchange of equipment.
C) are treated the same under IFRS and GAAP.
D) include the gains and losses due to management restructuring.

Question 72

If an item is unusual but not infrequent it is:

A) reported net of tax as Other Gains and Losses.
B) reported at its gross amount as Other Gains and Losses.
C) disclosed as a note to the financial statements.
D) reported as an extraordinary item.

Question 73

If a company reports both basic and diluted EPS, diluted EPS will always be lower than basic EPS.

Question 74

Prior-period adjustments are reported on the income statement.

Question 75

A prior-period adjustment is reported as an adjustment to the beginning balance of retained earnings.

Question 76

The ratio that uses weighted-average number of shares of common stock outstanding in the denominator is the:

A) earnings per share.
B) gross profit percentage.
C) price-earnings ratio.
D) current ratio.

Question 77

Items appear on the income statement in which order?

A) Extraordinary items, Discontinued operations, Other revenues and expenses
B) Discontinued operations, Extraordinary items, Other revenues and expenses
C) Other revenues and expenses, Discontinued operations, Extraordinary items
D) Other revenues and expenses, Extraordinary items, Discontinued operations

Question 78

The income statement and the statement of cash flows often paint the same picture of the company.

Question 79

Central City, Inc. has incurred a $50,000 loss on property due to an earthquake. Earthquakes have occurred in this region. What amount will be reported for this loss on company's income statement, assuming a 30% tax rate?

A) $50,000
B) $35,000
C) $15,000
D) Zero, due to the fact that this event is infrequent in nature.

Question 80

Changes in accounting estimates:

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