Deck 12: Income and Changes in Retained Earnings

Question 1

The amount of cash dividends paid to common stockholders is part of the computation of earnings per share.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

Discontinued operations should be shown on the statement of retained earnings net of taxes.

Answer 3

False

Question 4

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

Question 5

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

Question 6

"Discontinued operations" is an example of an unusual and/or infrequent item.

Question 7

An unusual and infrequent item (a non-recurring item)appears on the income statement before the section on discontinued operations.

Question 8

Diluted earnings per share are shown to alert investors that earnings per share could increase by the effects of conversions of securities into common stock.

Question 9

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

Question 10

Non-recurring items that are unusual and infrequent and the results of discontinued operations are shown in the income statement net of any related income tax effects.

Question 11

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

Question 12

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 13

The FASB has not compiled a comprehensive list of what is considered to be unusual and/or infrequent items;thus the determination is a matter of judgment.

Question 14

While the price-earnings ratio is computed using historical earnings,it reflects investors' expectations of future earnings.

Question 15

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

Question 16

Earnings per share is equal to net income applicable to common stock,divided by the weighted number of common shares outstanding.

Question 17

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

Question 18

Stock splits are always in a 2-for-1 ratio.

Question 19

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

Question 20

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

Question 21

Comprehensive income is a component of net income.

Question 22

The date on a statement of retained earnings is at a point in time,such as,at December 31,2018.

Question 23

Comprehensive income may be presented in a statement with net income,in a separate statement,or as part of the notes to the financial statements.

Question 24

A statement of stockholders' equity is not a required financial statement and need not be prepared along with a statement of retained earnings.

Question 25

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

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

Question 26

Unusual and infrequent non-recurring items are found on the income statement:

A)Before discontinued operations.
B)After discontinued operations.
C)Before income from continuing operations.
D)After prior period adjustments.

Question 27

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

Question 28

Doogle Corporation sold a segment of its operations in 2017 and suffered an loss in 2018 that was both unusual and infrequent.Which of the following would be the most useful in attempting to predict Doogle's performance for 2019?

A)Doogle's income from continuing operations in 2017 and 2018.
B)Doogle's net income in 2017 and 2018.
C)Doogle's total assets at the end of 2018.
D)Doogle's retained earnings at the end of 2018.

Question 29

Large stock dividends tend to keep stock prices down.

Question 30

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

Question 31

Prior period adjustments appear in the statement of retained earnings and in the income statement for the current year.

Question 32

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

Question 33

A prior period adjustment to retained earnings is made when a discovery of a material error was made to prior years' income.

Question 34

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

A)Unusual and infrequent non-recurring items
B)Prior period adjustment
C)Income from continuing operations
D)Discontinued operations

Question 35

Prior period adjustments are shown in the financial statements by adjusting the beginning balance of retained earnings in the statement of retained earnings.

Question 36

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

Question 37

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

Question 38

Execucomp Corporation's financial statements in the current year show a loss from discontinued operations,a prior period adjustment,and an unusual and infrequent gain.If Execucomp's 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)Prior period adjustment
B)Income from continuing operations
C)Loss from discontinued operations
D)Unusual and infrequent gain

Question 39

To qualify as an unusual and infrequent item,a gain or loss must:

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

Question 40

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 41

Which of the following items would be included in the discontinued operations section of the income statement?

A)Income or loss from operating the segment prior to its disposal.
B)The gain or loss on disposal of the segment.
C)Both the income (loss)from operating the segment prior to its disposal,and the gain or loss on disposal of the segment.
D)Only losses and not gains on the disposal of a segment.

Question 42

During the year 2018,Tosco Corporation suffered an $800,000 loss when its factory was destroyed in a flood.Assuming the corporate income tax rate is 36%,what amount will Tosco report as a non-recurring loss on its income statement for 2018? Assume floods are not common in this area.

A)$800,000
B)$512,000
C)$288,000
D)Nothing,since this does not qualify as a non-recurring item.

Question 43

An example of an unusual and infrequent 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)A loss due to restructuring charges.

Question 44

Which of the following statistics is generally computed for both common and preferred stock?

A)Earnings per share
B)Price-earnings ratio (P/E ratio)
C)Annual dividend per share
D)Retained earnings per share

Question 45

Which of the following would not be classified as an unusual and/or infrequent item?

A)A loss from an enacted law that made inventory unsalable
B)A loss from settlement of a lawsuit
C)A loss from a natural disaster that affects the company at infrequent intervals
D)A loss from restructuring charges

Question 46

The price-earnings ratio is the:

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

Question 47

Sovereign Foods suffered a $1,500,000 loss (net of tax)when the FDA prohibited the sale of food products containing red dye no.3.On its other products,Sovereign Foods had net sales of $6,580,000 and costs and other expenses of $6,505,000.Which of the following statements is not true? (Ignore taxes)

A)Sovereign Foods reports a net loss of $1,425,000 for the current year.
B)Sovereign Foods reports income before non-recurring items of $75,000.
C)Sovereign Foods combines the $1,500,000 loss with its other costs and expenses of $6,505,000,since this item does not qualify for any special disclosure.
D)Sovereign Foods shows the $1,500,000 loss in a separate section of the income statement as an nonrecurring item.

Question 48

The amount of earnings per share is usually computed:

A)For both preferred and common stock.
B)For common stock by deducting the dividends on preferred stock from net income and dividing the remaining amount by the weighted average number of common shares outstanding.
C)By dividing net income by the combined number of preferred and common 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 49

During the year 2018,Torino Corporation suffered a $1,200,000 loss when its factory was severely damaged in an earthquake.Assuming the corporate income tax rate is 30%,what amount will Torino report as anon-recurring loss on its income statement for 2018? Assume earthquakes are not common in this area.

A)$1,200,000
B)$840,000
C)$360,000
D)Nothing,since this does not qualify as a non-recurring item.

Question 50

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 preferred stockholders.
B)The amount of cash dividends declared or paid to common stockholders.
C)Net income.
D)The number of shares of common stock issued.

Question 51

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 52

Corona Corporation's financial statements for the current year include the following: On the basis of this information,net income for the current year is:

A)$1,359,600.
B)$ 818,400.
C)$1,485,000.
D)$1,234,200.

Question 53

General Corporation was organized on January 1 and issued 500,000 shares of common stock on that date.On July 1,an additional 200,000 shares were issued for cash.Net income for the year was $5,184,000.Net earnings per share amounted to:

A)$7.41.
B)$7.98.
C)$8.41.
D)$8.64.

Question 54

Earnings per share figures are shown in the income statement:

A)For income before non-recurring items and for income from continuing operations,as well as for net income.
B)For common stock as well as for preferred stock.
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 55

Colfax Corporation's financial statements for the current year include the following: On the basis of this information,net income for the current year is:

A)$1,251,200.
B)$ 696,400.
C)$ 570,600.
D)$1,439,600.

Question 56

The common stock of Securetech Corporation consistently sells at a market price of 20 times earnings .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 57

The numerator in calculating earnings per share is reduced for:

A)Noncumulative preferred dividends declared.
B)Common dividends.
C)Common stock dividends.
D)Any form of dividend.

Question 58

Family Fashions Corporation discontinued Kid-Choice,its entire line of children's clothing,in November of 2018.Prior to the disposal,Kid-Choice generated a loss of $600,000 (net of tax)for the period from January through the sale date.Because of the value of the real estate and machinery,there was a gain of $850,000 (net of tax)on the actual sale.How should this situation be reported in the financial statements of Family Fashions for 2018?

A)A $250,000 gain should be included in the 2018 income statement as a non-recurring item.
B)A $600,000 loss should be included in income from operations and a $850,000 gain should be reported in the "discontinued operations" section of the income statement.
C)A $250,000 adjustment to beginning retained earnings should be in the statement of retained earnings.
D)A $250,000 gain should be in the "discontinued operations" section of the income statement.

Question 59

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

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

Question 60

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

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

Question 61

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

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

Question 62

Which of the following would not be used in computing diluted earnings per share?

A)Preferred stock
B)Convertible bonds
C)Stock options
D)Weighted-average number of shares of common stock outstanding during the year

Question 63

On January 1,2018,Alice Corporation had 20,000 shares of $6 par value common stock and 10,000 shares of 8%,$100 par value convertible preferred stock outstanding.The preferred shares carried a 3-for-1 conversion privilege.As of December 31,2018,none of the preferred shares had been converted.What number of shares must Alice use in computing diluted earnings per share at December 31,2018?

A)10,000
B)20,000
C)30,000
D)50,000

Question 64

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 65

For the current year,Voque Company reported basic earnings per share of $8 and diluted earnings per share of $3.The difference between these figures is attributable to outstanding shares of convertible preferred stock.If all this preferred stock had actually been converted into common stock at the beginning of the current year,Voque Company would have reported only one earnings per share amount,which would have been:

A)$8.
B)$5.
C)$3.
D)Cannot be determined.

Question 66

On January 1,2018,Ole Corporation had 75,000 shares of $8 par value common stock outstanding.On July 31,2018,Ole issued an additional 10,000 shares in exchange for a building.What number of shares will be used in the computation of earnings per share for the year 2018?

A)75,000
B)80,000
C)79,167
D)85,000

Question 67

Stock splits:

A)Allow management to conserve cash.
B)Give stockholders more shares.
C)Cause no change in total assets,liabilities,or stockholders' equity.
D)Allow management to conserve cash,give stockholders more shares,and cause no change in total assets,liabilities,or stockholders' equity.

Question 68

A small stock dividend is recorded at:

A)Market value.
B)Book value.
C)Par value.
D)No amount,just a memorandum entry is required.

Question 69

On January 1,2018,Carleton Corporation had 55,000 shares of $6 par value common stock outstanding.On March 31,2018,Carleton issued an additional 10,000 shares in exchange for a building.What number of shares will be used in the computation of earnings per share for the year 2018?

A)55,000
B)65,000
C)62,500
D)62,000

Question 70

Large stock dividends tend to:

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

Question 71

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 or the other would be reported.

Question 72

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 stock split
D)A prior period adjustment

Question 73

National Corporation was organized on January 1 and issued 600,000 shares of common stock on that date.On July 1,an additional 200,000 shares were issued for cash.Net income for the year was $3,675,000.Net earnings per share amounted to:

A)$5.25.
B)$6.13.
C)$4.59.
D)$9.19.

Question 74

Platinum Company reports net income of $520,000 for 2018 and declared a cash dividend of $1 per share on each of its 100,000 shares of common stock outstanding.What are earnings per share for 2018?

A)$5.20 per share
B)$1.00 per share
C)$1.20 per share
D)$4.80 per share

Question 75

A company had 240,000 shares of common stock outstanding on January 1 and then sold 60,000 additional shares on April 30.Net income for the year was $426,750.What are earnings per share?

A)$1.42
B)$1.52
C)$1.78
D)$7.11

Question 76

Unique Corp.had 50,000 shares of $5 preferred stock,$100 par,and 100,000 shares of $1 par common stock outstanding throughout the year.Net income for the year was $780,000,and Unique declared and distributed a cash dividend of $1 per share on its common stock.Earnings per share amounted to:

A)$7.80.
B)$1.00.
C)$5.30.
D)$2.30.

Question 77

On January 1,2018,Edward Corporation had 10,000 shares of $6 par value common stock and 10,000 shares of 8%,$100 par value convertible preferred stock outstanding.The preferred shares carried a 3-for-1 conversion privilege.On October 1,2018,all of the preferred shares were converted to common.What number of shares must Edward use in computing basic earnings per share at December 31,2018?

A)17,500
B)40,000
C)7,500
D)10,000

Question 78

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

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

Question 79

On January 31,2018,Village Bank had 500,000 shares of $2 par value common stock outstanding.On that date,the company declared a 14% stock dividend when the market price of the stock was $37 per share.The immediate effect of this dividend upon Village Bank was:

A)A reduction in cash of $2,590,000.
B)A reduction in retained earnings of $2,590,000.
C)A reduction in retained earnings of $140,000.
D)A liability to the stockholders of $140,000.

Question 80

Designs,Inc.had 4,000 shares of $7,$100 par preferred stock and 50,000 shares of common stock outstanding throughout 2018.During 2018,Designs declared a dividend of $7 per share on its common stock.Compute earnings per share for 2018 if Designs' income statement showed net income of $630,000.

A)$7.00 per share
B)$6.00 per share
C)$12.04 per share
D)$12.60 per share