Deck 12: Profit and Changes in Retained Earnings

Question 1

Recent rulings by the SEC now require all corporations to prepare an expanded version of the Statement of Changes in Equity showing all equity accounts and their changes for the last three years.

Answer 1

False

Question 2

Diluted earnings per share represents a hypothetical case, showing what earnings per share would be if certain securities were converted into additional shares of ordinary share.

Answer 2

True

Question 3

Diluted earnings per share are shown to alert investors that earnings per share could be increased by the effects of conversions of securities into ordinary share.

Answer 3

False

Question 4

A retrospective restatement to retained earnings is made when a discovery of a material error was made to prior years' profit.

Question 5

The IASB has prohibited the reporting of what is considered to be an extraordinary item.

Question 6

A statement of shareholders' equity is not a required financial statement and need not be prepared along with a statement of changes in equity.

Question 7

Extraordinary items and the results of discontinued operations are shown in the income statement net of any related income tax effects.

Question 8

The price earnings ratio is based on expected future earnings while the earnings per share ratio is based on historical earnings.

Question 9

A stock dividend provides a shareholder with more shares of stock but his or her percentage of ownership in the company, is no larger than before.

Question 10

When a corporation presents both "basic" and "diluted" earnings per share, basic earnings per share will be the smaller of the two figures.

Question 11

In order to receive a dividend, a shareholder must have owned the shares as of the declaration date.

Question 12

Comprehensive income differs from profit in that it includes events that are recognized but not realized.

Question 13

Comprehensive income is a component of profit.

Question 14

The amount of cash dividends paid to ordinary shareholders is part of the computation of earnings per share.

Question 15

In order for a loss on the disposal of a discontinued operation to be classified on the income statement as a discontinued operation, it must be unusual in nature.

Question 16

When a small (under 10%) stock dividend is declared the market value of the share is transferred from Retained Earnings into other shareholder equity accounts.

Question 17

Earnings per share is equal to profit applicable to ordinary share divided by the weighted number of ordinary shares outstanding.

Question 18

An extraordinary item appears on the income statement before the section on discontinued operations.

Question 19

A share split changes the par value of a share whereas a stock dividend does not.

Question 20

In determining earnings per share when a preference share has dividends in arrears, only the current year's dividend is deducted to arrive at earnings per share.

Question 21

A company failed to make an adjusting entry in the prior year to accrue earned revenue. To correct this they should:

A) Correct last year's statement by increasing Profit
B) Correct this year's statements with a retrospective restatement increasing beginning retained earnings
C) Correct this year's statements with a retrospective restatement decreasing beginning retained earnings.
D) Correct this year's statements with a retrospective restatement increasing ending retained earnings.

Question 22

Share splits are always in a 2 for 1 ratio.

Question 23

Retrospective restatements are shown in the financial statements by adjusting the beginning balance of retained earnings in the statement of changes in equity.

Question 24

Large stock dividends tend to keep share prices down.

Question 25

"Discontinued operations" is an example of an extraordinary item.

Question 26

Stock dividends and share splits do not cause a change in the total amount of shareholders' equity.

Question 27

The statement of changes in equity discloses the amount of cash dividends as well as stock dividends declared during the current year.

Question 28

The amount transferred out of retained earnings when a 4% stock dividend is declared is equal to the prevailing market value per share times the number of dividend shares to be distributed.

Question 29

According to the Sarbanes-Oxley Act lying to an external auditor can create a criminal penalty as well as a civil penalty.

Question 30

A small stock dividend is recorded at:

A) Market value
B) Book value
C) Par value
D) None of the above, just a memorandum entry is required.

Question 31

Share splits

A) Allow management to conserve cash.
B) Give shareholders more shares.
C) Cause no change in total assets, liabilities, or shareholders' equity.
D) All of the above.

Question 32

Treasury share appears as:

A) An asset account
B) A liability account
C) An expense account
D) An equity account

Question 33

The expropriation (seizure of) of a multinational company's assets by a government is an example of a discontinued operation item.

Question 34

Discontinued operations should be shown on the statement of changes in equity net of taxes.

Question 35

In an attempt to appeal to investors, a company may be tempted to overstate profit.

Question 36

Retrospective restatements appear in the statement of changes in equity and in the income statement for the current year.

Question 37

Comprehensive income may be presented in a separate statement of comprehensive income, or as part of an income statement.

Question 38

Where on the income statement are extraordinary items found ?

A) Before discontinued operations
B) Nowhere, since IFRS prohibits such reporting
C) Before profit from continuing operations
D) After retrospective restatements

Question 39

A company had 125,000 shares of ordinary share outstanding on January 1 and then sold 35,000 additional shares on March 30. Profit for the year was $594,750. What are earnings per share?

A) $4.73
B) $4.58
C) $3.93
D) $6.61

Question 40

It would be reasonable to assume that

A) Basic earnings per share should exceed diluted earnings per share
B) Diluted earnings per share should exceed basic earnings per share
C) Basic earnings per share should be equal to diluted earnings per share.
D) Basic earnings per share would not be presented with diluted earnings per share.

Question 41

An example of an extraordinary gain or loss is:

A) A large loss arising from inability to collect an account receivable from a bankrupt customer.
B) A large gain from disposal of a segment of the business.
C) A gain or loss from sale of an expensive machine no longer needed in the business.
D) None of these answers.

Question 42

Large stock dividends tend to:

A) Increase share prices.
B) Have no effect upon share prices.
C) Keep share prices down.
D) Describe total assets.

Question 43

Which of the following would have no effect on Retained Earnings?

A) Declaration of a cash dividend
B) Declaration of a stock dividend
C) Declaration of a share split.
D) A retrospective restatement

Question 44

The amount of earnings per share is usually computed:

A) For both preference and ordinary share.
B) For ordinary share by deducting the dividends on preference share from profit and dividing the remaining amount by the weighted average number of ordinary shares outstanding.
C) By dividing profit by the combined number of preference and ordinary shares.
D) On the basis of the number of shares outstanding at year-end, regardless of changes in the number of shares during the year.

Question 45

In computing earnings per share, the number of shares used is:

A) The year-end number of shares outstanding.
B) The beginning of the year number of shares outstanding.
C) The average of the beginning and the year-end number of shares outstanding.
D) The weighted average of shares outstanding for the year.

Question 46

Execucomp Corporation's financial statements in the current year show a loss from discontinued operations, a retrospective restatement. If Execucomp income statement is prepared according to generally accepted accounting principles (as illustrated in your text), which of the following four items would appear second in sequence in the income statement?

A) Retrospective restatement.
B) Profit from continuing operations.
C) Loss from discontinued operations.
D) Extraordinary gain.

Question 47

A retrospective restatement is a correction made to:

A) Retained earnings of the beginning of the period
B) Retained earnings at the end of the period
C) Profit of the current year
D) Only to last years' financial statements

Question 48

In preparing the financial statements for 2009, an accountant improperly classified a gain from discontinued operations as an extraordinary item. Which of the following amounts would be incorrect as a result of this improper classification?

A) Profit for 2009.
B) Ending retained earnings at December 31, 2009.
C) Profit from continuing operations for 2009.
D) None of the above would be incorrect.

Question 49

Of the items listed, which would appear closest to the bottom of the income statement?

A) Discontinued operations
B) Retrospective restatement
C) Profit from continuing operations
D) Extraordinary items

Question 50

All things being equal, if investors expect earnings to increase substantially from current levels, the price/earnings ratio will:

A) Be quite low.
B) Be quite high.
C) Not change.
D) Not be affected by income expectations.

Question 51

The ordinary share of Securetech Corporation consistently sells at a market price of 20 times earnings, i.e., at a p/e ratio of 20. What would be the most likely effect of a 10 cent increase in Securetech's basic EPS?

A) An increase in market price of approximately 10 cents per share.
B) An increase in market price of approximately $2 per share.
C) A reduction in the p/e ratio due to the larger EPS.
D) Nothing, since market price reflects expectations of future earnings.

Question 52

Which of the following statistics is generally computed for both ordinary and preference share?

A) Earnings per share.
B) Price-earnings ratio (p/e ratio).
C) Annual dividend per share.
D) Retained earnings per share.

Question 53

To qualify as a discontinued operation, a gain or loss must:

A) Affect the profit of a prior period.
B) Be larger in amount than any other item in the income statement.
C) Be associated with a segment of the business that has been discontinued during the current period
D) Be material in amount, unusual in nature, and not expected to recur

Question 54

The numerator in calculating earnings per share is reduced for:

A) Preference share dividends.
B) Ordinary dividends.
C) Ordinary share dividends.
D) All three above.

Question 55

The purpose of developing the subtotals "Profit from Continuing Operations" in an income statement is to:

A) Assist investors in forecasting future operating results.
B) Increase the amount of reported profit.
C) Decrease the amount of profit subject to income taxes.
D) Provide investors with the information necessary to compute earnings per share.

Question 56

Which of the following qualify as an extraordinary item?

A) A large gift given to the company.
B) A loss from obsolete inventory.
C) A loss from a natural disaster that affects the company at infrequent intervals.
D) None of the above.

Question 57

The Price Earnings Ratio is the

A) Book value of a share of ordinary share divided by EPS
B) Market price of a share of ordinary share divided by EPS.
C) Par value of a share of ordinary share divided by EPS.
D) Market price divided by book value of a share.

Question 58

Doogle Corporation sold a segment of its operations in 2009 and suffered a one-time loss in 2010. Which of the following would be the most useful in attempting to predict Doogle's performance for 2011?

A) Doogle's profit from continuing operations in 2009 and 2010.
B) Doogle's profit in 2009 and 2010
C) Doogle's total assets at the end of 2010.
D) Doogle's retained earnings at the end of 2010.

Question 59

Earnings per share figures are shown in the income statement:

A) For profit before extraordinary items and for profit from continuing operations, as well as for profit.
B) For ordinary share as well as for preference share.
C) For all publicly owned, as well as for all privately held, corporations.
D) As an optional disclosure for all corporations, and may be omitted completely or disclosed in a footnote at the option of the issuing corporation.

Question 60

Which of the following has no effect on the computation of earnings per share for the current period?

A) The amount of cash dividends declared or paid to preference shareholders.
B) The amount of cash dividends declared or paid to ordinary shareholders.
C) Profit.
D) The number of shares of ordinary share authorized.

Question 61

When a company reports both diluted earnings per share and basic earnings per share:

A) Basic EPS would be greater than fully diluted EPS.
B) Basic EPS would be less than fully diluted EPS.
C) Basic EPS may be either greater or less than fully diluted EPS.
D) Both should never be shown - only one would be reported.

Question 62

Comprehensive income can be displayed to users of financial statements in which of the following way(s):

A) As an item on the balance sheet..
B) In the notes accompanying the financial statements.
C) As an element in the changes in shareholders' equity displayed as a column in the statement of shareholders' equity.
D) As a single income statement that includes both the components of profit and the components of other comprehensive income or as a second income statement.

Question 63

Diluted earnings per share is a hypothetical computation to warn shareholders what could happen if:

A) Loss contingencies turn out adversely.
B) Convertible securities are converted into ordinary shares.
C) Extraordinary losses were to recur.
D) Consideration was given to the loss from operations discontinued during the current period.

Question 64

A liquidating dividend:

A) Occurs when a corporation distributes its own shares as a dividend, rather than cash.
B) Occurs whenever a corporation distributes non-cash assets as a dividend to its shareholders.
C) Represents a distribution of a corporation's profits to the shareholders.
D) Represents a return of invested capital to a corporation's owners, the shareholders.

Question 65

Dividends become a liability of a corporation:

A) On the date the board of directors declares the dividend.
B) On the date of record.
C) On the date payment is to be made.
D) When cumulative preference share dividends are in arrears.

Question 66

Declaration and distribution of a stock dividend cause each of the following effects except:

A) An increase in the number of shares outstanding.
B) A decrease in retained earnings.
C) A decrease in total assets of the issuing corporation.
D) An increase in legal capital of the issuing corporation.

Question 67

After preparing the financial statements for 2009, the accountant for the Dawson Corporation discovered that a retrospective restatement had been omitted from the 2007 financial statements. Which of the following is most likely to require correction as a result of this oversight?

A) Earnings per share as originally computed.
B) Profit for 2009 as originally reported.
C) Ending retained earnings at December 31, 2009.
D) Extraordinary items as originally reported.

Question 68

As a result of a 5% stock dividend:

A) Total shareholders' equity decreases by 5%.
B) The par value per share decreases by 5%.
C) The number of shares owned by each shareholder increases by 5%, but total shareholders' equity does not change.
D) Both the number of shares outstanding and the total shareholders' equity increase by 5%.

Question 69

If a company presents both the basic and diluted earnings per share, the price/earnings ratio is based on:

A) The basic figure.
B) The diluted figure.
C) The average of the basic and diluted figures.
D) A combination of the basic and diluted figures.

Question 70

A restriction of retained earnings:

A) Reduces the dollar amount of retained earnings shown in the balance sheet.
B) Appears in the statement of retained earnings as a reduction of ending retained earnings.
C) Appears in the liability section of the balance sheet.
D) Limits the dollar amount of dividends a corporation may declare.

Question 71

A retrospective restatement appears in the financial statements of the current year when:

A) An error was made in computing the profit of the current period.
B) An error was made in measuring the profit of a previous year or years.
C) An extraordinary loss in a prior year was included among normal results of operations in the prior year.
D) Earnings per share figures from prior years are restated to reflect the increased number of shares outstanding due to a share split or a stock dividend.

Question 72

To receive the next cash dividend, an investor must purchase the share before the:

A) Dividend declaration date.
B) Ex-dividend date.
C) Date of record.
D) Payment date announced by the board of directors.

Question 73

Dividends are first recorded and retained earnings are reduced on:

A) The ex-dividend date.
B) The date of record.
C) The date of declaration.
D) The date of payment.

Question 74

If a material accounting error was made in a prior year, that error:

A) Should be reflected on the current year's income statement.
B) Should be reflected, net of taxes, on the retained earnings statement.
C) Should be reflected as a change in accounting principle.
D) Should be considered as an extraordinary item and shown, net of taxes on the income statement.

Question 75

A 2-for-1 share split:

A) Is accounted for in the same way as a 100% stock dividend.
B) Increases the number of outstanding ordinary shares, but par value per share remains the same as before the split.
C) Is recorded by transferring the par value of additional shares from retained earnings to the ordinary share account.
D) Should logically cause the market price per share to drop by approximately 50%.

Question 76

Which of the following would be treated as a retrospective restatement by Gold Corporation in 2010?

A) In 2010, it was discovered that Gold Corporation recorded the purchase of a warehouse in 2007 as a debit to Repairs Expense.
B) In 2010, Gold Corporation switched from the straight-line method of depreciation to another method of computing depreciation.
C) In 2010, Gold Corporation's management decided that the estimated useful life of its computer equipment should be changed from five years to nine years.
D) In 2010, Gold Corporation sold a segment of the business that it has operated since 1996.

Question 77

A retrospective restatement appears in:

A) The income statement following the subtotal "Profit before Retrospective Restatements."
B) The statement of changes in equity as an adjustment to the ending balance of retained earnings.
C) Footnotes to the financial statements.
D) The statement of changes in equity as an adjustment to the beginning balance of retained earnings.

Question 78

Supervox Corporation declared a 3-for-2 ordinary share split, but this transaction was erroneously recorded as a 50% ordinary share dividend. As a result:

A) Retained earnings is understated.
B) The total dollar amount of shareholders' equity is overstated.
C) The corporate records do not show the correct number of ordinary shares outstanding.
D) The ordinary share account is understated.

Question 79

A large stock dividend and a share split are similar in that they both cause a:

A) Reduction in total shareholders' equity.
B) Reduction in retained earnings.
C) Reduction in the par value per share.
D) Reduction in the market price per share.

Question 80

When a stock dividend is declared, total shareholders' equity will:

A) Decrease.
B) Increase.
C) Not change.
D) Increase or decrease, depending upon certain variables.