Deck 5: The Income Statement and the Statement of Cash Flows

Question 1

Companies with lower coverage ratios have a greater risk and a lower financial flexibility.

Answer 1

True

Question 2

To classify an event or transaction as extraordinary it must be unusual in nature and infrequent in occurrence.

Answer 2

True

Question 3

Together with the cash flow statement, the income statement enables the investors to determine the rate of return the company is generating relative to the amount of capital invested.

Answer 3

False

Question 4

Interperiod tax allocation involves apportioning a corporation's total income tax expense for a period to the various components of its net income and other comprehensive income items.

Question 5

If a company does not have any discontinued operations or extraordinary items to list on its income statement, the labels should still be there with a zero balance noted.

Question 6

Under U.S. GAAP or IFRS, a company can report its comprehensive income or loss under present net income and comprehensive income in a single continuous performance statement or in a separate but consecutive financial statement.

Question 7

Systematic and rational allocation is used to recognize revenue.

Question 8

The most common way in which to prepare the statement of cash flows is the indirect method, which is encouraged by FASB.

Question 9

Gains or losses associated with derivative financial instruments would be included in income from continuing operations.

Question 10

A terrorist attack would be considered an extraordinary event because terrorist attacks are infrequent in nature.

Question 11

When a company classifies a component as held for sale it must report the component on its balance sheet at the lower of its book value or its fair value minus costs to sell.

Question 12

A company does not have to disclose information about the sale of a discontinued component in the notes to its financial statements until the actual sale has occurred.

Question 13

When a parent company owns a majority of the common shares of a subsidiary company but not 100% of them, the parent company will consolidate all of the subsidiary's revenues and expenses into its financial statements.

Question 14

To compute earnings per share the denominator is net income attributable to common shareholders less any preferred stock dividends for the period.

Question 15

The amount of money that can be distributed to shareholders as a return on capital, without being a return of capital, is the capital financial concept.

Question 16

The income statement predicts a company's future income and cash flows.

Question 17

U.S. GAAP and IFRS companies commonly measure and report net income and comprehensive income.

Question 18

There is no prescribed income statement format under IFRS whereas U.S. GAAP requires the use of the single-step or the multiple-step format.

Question 19

The statement of cash flows provides external users the ability to analyze the information required to access a company's risk, liquidity, financial flexibility, and operating capability.

Question 20

Revenue can be recognized either when it is earned or collection has occurred or reasonably certain to occur.

Question 21

In accrual accounting, net income is defined as

A) Revenues - Expenses + Gains + Losses
B) Revenues - Expenses
C) Revenues - Expenses + Gains - Losses
D) increase in net assets from nonowner transactions

Question 22

Examples of matching expenses against revenues using the association of cause and effect include all of the following except

A) insurance costs
B) transportation costs for delivery of goods to customers
C) costs of products sold
D) sales commissions

Question 23

Which of the following is not an expense recognition approach recognized by the FASB as an expense recognition principle to properly match expenses against revenues?

A) immediate recognition
B) systematic and rational allocation
C) cash payment
D) association of cause and effect

Question 24

Below is a list of account balances for Fraggle Company: What is Fraggle Company's net income, assuming a 30% tax rate?

A) $163,380
B) $233,400
C) $242,500
D) none of these

Question 25

On December 31, 2014, the net assets of Martinez Manufacturing amounted to $40,000. Net income calculated by using the financial capital maintenance concept amounted to $12,000. During the year, additional common stock was issued for $8,000, and $5,000 of dividends was paid. The net assets at January 1, 2014, amounted to

A) $31,000
B) $37,000
C) $20,000
D) $25,000

Question 26

Who is the income statement designed to inform?

A) creditors
B) investors
C) lenders
D) all of these

Question 27

The income statement helps users

A) assess the company's risk
B) review the impact of economic factors affecting the company
C) compare and contrast performance against a competitor
D) all of these

Question 28

To be recognized as revenue, an item must

A) meet the definition of earned revenue
B) be earned revenue and be realized or realizable
C) be realized
D) be earned

Question 29

A segment must pass all of the tests in order for it to be considered a reportable segment. These tests include the revenue, profit, and asset tests.

Question 30

Which of the following is helpful to report separately?

A) expenses that vary with volume of activity
B) expenses that are discretionary
C) expenses that depend on other economic factors
D) all of these

Question 31

One method of revenue recognition that postpones the recognition until after the time of sale is

A) percentage-of-completion
B) proportional performance
C) cost recovery
D) point of sale

Question 32

A company is not required to follow a specific format in making the disclosures for its segments but FASB encourages the most useful format for its specific circumstances.

Question 33

The SEC scrutinizes reported earnings numbers to assess the quality of earnings and to detect any potential for earnings management.

Question 34

Georgio Company began 2014 with net assets of $80,000. Net income calculated by using the capital maintenance concept was $21,000. During 2014 owners contributed $26,000 of new capital. By year-end, the net assets totaled $78,000. Dividends to the owners during 2014 were

A) $49,000
B) $28,000
C) $23,000
D) $2,000

Question 35

The income statement reports

A) revenue and expenses for a given point in time.
B) revenue and expenses for a specific date.
C) revenue, expenses, gains and losses for a specified period of time.
D) revenues, expenses, gains and losses for a specific date.

Question 36

The income statement is an important financial statement for all of the following reasons, except

A) the income statement helps shareholders evaluate management's operating effectiveness
B) past income statements can be useful indicators in predicting current and future cash dividend payments as well as future stock prices
C) the income statement provides useful information concerning the corporation's ability to generate sufficient cash flows from operations for use in payment of its operating obligations
D) the income statement reports the amount of net cash inflows resulting from operating, financing, and investing activities to users

Question 37

In general, revenue is recognized as being earned

A) during the production process
B) upon completion of the production process
C) when cash is received
D) when goods are sold or services are rendered

Question 38

Operating capability refers to

A) the ability of a company to adapt to unexpected needs and opportunities
B) the uncertainty or unpredictability of the future results of a company
C) a measure of overall company performance
D) a company's ability to maintain a given level of operations

Question 39

Realization of revenue occurs when

A) the item is formally recorded and reported in the financial statements
B) noncash resources are converted into cash or rights to cash
C) the actual exchange of noncash resources into cash
D) when a transaction is both realized and realizable

Question 40

Which of the following is not a purpose of the income statement?

A) used to evaluate management's performance
B) predicts the company's future assets and liabilities
C) used to compare performance against other companies
D) assesses the company's risk

Question 41

Which of the following expenses is an example of expense recognition under the immediate recognition principle?

A) sales commissions
B) depreciation
C) management salaries
D) transportation-out

Question 42

From the following information, compute cost of goods sold.

A) $15,300
B) $15,200
C) $15,100
D) $15,000

Question 43

Intraperiod tax allocation requires a corporation's total income tax expense to be allocated to all of the following except

A) extraordinary items
B) other revenues and expenses
C) discontinued operations
D) prior-period adjustments

Question 44

Which of the following is not a component of the income statement?

A) unusual and nonrecurring gains and losses
B) net income
C) income taxes
D) accumulated other comprehensive income

Question 45

The subtotal, gross profit, will be disclosed on

A) a multiple-step income statement
B) both multiple-step and single-step income statements
C) neither multiple-step nor single-step income statements
D) a single-step income statement

Question 46

All of the information required in the computation of cost of goods sold is presented below, except for purchases, which must be what amount?

A) $10,800
B) $11,200
C) $9,700
D) $10,200

Question 47

Which of the following is not used as a caption if there is nothing to report?

A) income from continuing operations
B) extraordinary items
C) interest expense
D) income taxes

Question 48

A company that discontinues and disposes of an operation (component) should include the gain or loss on sale in the income statement as a(n)

A) prior-period adjustment
B) extraordinary item
C) amount after income from continuing operations and before extraordinary items
D) bulk sale of fixed assets included in income from continuing operations

Question 49

Depreciation is an example of which expense recognition principle?

A) association of cause and effect
B) systematic and rational allocation
C) cost recovery
D) immediate recognition

Question 50

Which of the following would appear after the heading of operating income?

A) cost of goods sold
B) other operating income items (gains or losses)
C) operating expenses
D) unusual and nonrecurring gains or losses

Question 51

Which of the following is a required disclosure in the income statement when reporting the sale of a component of the business?

A) The gain or loss on sale should be reported as an extraordinary item.
B) Results of operations of a discontinued component should be disclosed immediately below extraordinary items.
C) Earnings per share from both income from continuing operations and net income should be disclosed on the face of the income statement.
D) Revenue and expenses applicable to the discontinued operations should be disclosed in the income statement.

Question 52

When an entity reports on a sale of a component of the business

A) any income or loss from operations of the component should be reported in the income from continuing operations section, but any gain or loss on the sale of the component should be presented below the income from continuing operations section
B) current operating income or loss of the component and any gain or loss on sale of the component should be presented in a separate section of the income statement
C) any gain or loss on the sale should always be presented in the extraordinary gain or loss section of the income statement
D) all information related to the sold component should be reported solely in the footnotes accompanying the financial statements

Question 53

The gross profit of Larry Company for 2014 is $300,000, cost of goods manufactured is $400,000, the beginning inventories of goods in process and finished goods are $28,000 and $35,000, respectively, and the ending inventories of goods in process and finished goods are $50,000 and $70,000, respectively. The cost of goods sold of Larry Company for 2014 must have been

A) $378,000
B) $265,000
C) $278,000
D) $365,000

Question 54

All of the following are included in the computation of cost of goods sold except

A) freight-out
B) purchase returns and allowances
C) beginning finished goods inventory
D) freight-in

Question 55

Which of the following are components of the income statement?

A) revenues
B) extraordinary items
C) income from continuing operations
D) all of these

Question 56

Which is least likely to be classified as a sale of a component?

A) sale by a communications company of its radio stations, but none of its television stations
B) sale by a food distributor of its wholesale supermarket division while maintaining its wholesale fast-food restaurants division
C) sale by an apparel manufacturer of a woolen suit manufacturing plant in order to concentrate on the manufacture of suits from synthetic products
D) sale by a meat-packing company of its (entire) 20% interest in a professional football team

Question 57

In distinguishing between revenues and gains, which of the following statements is false?

A) More gains than revenues are beyond the entity's control.
B) Gains are associated more with peripheral, nonoperating activities than are revenues.
C) GAAP does not provide precise distinctions between revenues and gains.
D) Revenues are reported net (rather than gross) more often than gains.

Question 58

The major components of the income statement are listed below: A = extraordinary items
B = income from continuing operations
C = earnings per share
D = results from discontinued operations
In what sequence do they normally appear on the income statement?

A) B-A-D-C
B) B-A-C-D
C) B-D-A-C
D) B-D-C-D

Question 59

Intraperiod tax allocation

A) is used to allocate a company's total income tax expense to the components of net income and comprehensive income
B) involves temporary (timing) differences between financial and taxable incomes
C) requires allocation of deferred taxes across accounting periods
D) results from differences between tax regulations and the principles followed to determine financial income

Question 60

In 2014, Dallas Company had sales of $600,000; cost of sales of $430,000; interest expense of $12,000; a gain on the sale of a component of $52,000; and an extraordinary loss of $25,000. For its income statement, Dallas uses the single-step format and the all-inclusive concept. What was Dallas's reported pretax income from continuing operations?

A) $150,000
B) $170,000
C) $158,000
D) $118,000

Question 61

IFRS content in the income statement is similar to U.S. GAAP in all of the following areas except the disclosure of

A) revenues
B) finance costs
C) extraordinary items
D) tax expense

Question 62

The numerator in the earnings per share calculation is

A) only the amount available to common stockholders
B) net income attributable to common shareholders
C) net income minus declared preferred stock dividends
D) all of these

Question 63

Which of the following material gains/losses would be disclosed as an extraordinary item on an entity's income statement?

A) a loss arising from the write-off of a large uncollectible accounts receivable balance
B) a loss arising from the expropriation of a manufacturing plant by a foreign government
C) a gain from the sale of a component of the entity's business
D) a gain from the sale of manufacturing equipment no longer needed by the entity

Question 64

Under which of the following conditions would hurricane damage be considered an extraordinary item for income reporting purposes?

A) only if hurricanes in the geographical area are unusual in nature and occur infrequently
B) only if hurricanes are normal in the geographical area but do not occur frequently
C) only if hurricanes occur frequently in the geographical area but can be covered by insurance policies
D) under any circumstances hurricane damage should be classified as an extraordinary item

Question 65

Exhibit 5-1 The following condensed income statement of Ranger Corporation is presented for the two years ended December 31, 2014 and 2013:



On January 1, 2014, Ranger entered into an agreement to sell one of its separate operating divisions for $2,000,000. The sale resulted in a gain on disposition of $900,000 on November 12, 2014, and qualifies as a discontinued component. This division's contribution to Ranger's reported income before income taxes for each year was as follows:

Assume an income tax rate of 30%.


-Refer to Exhibit 5-1. In the preparation of a revised comparative income statement, Ranger should report income from continuing operations after income taxes for 2014 and 2013, respectively, amounting to

A) $1,540,000 and $700,000
B) $1,540,000 and $980,000
C) $1,680,000 and $700,000
D) $1,680,000 and $980,000

Question 66

A review of the December 31, 2014, financial statements of Run Corporation revealed that under the caption "extraordinary losses," Run reported a total of $300,000. Further analysis revealed that the $300,000 in losses comprised the following items:
1.Run recorded a gain of $80,000 incurred in the sale of equipment.
2.In an unusual and infrequent occurrence, a loss of $350,000 was sustained as a result of tornado damage to a manufacturing facility.
3.During 2014, several factories were shut down during a major strike by employees of Run's major customer. Shutdown expenses totaled $150,000.
4.Inventory in the amount of $30,000 was written off as obsolete.

Ignoring income taxes, what amount of loss should Run have reported as an extraordinary loss on its 2014 income statement?

A) $150,000
B) $350,000
C) $280,000
D) $500,000

Question 67

In 2014, Walker Company wrote off a $300,000 debt from a major customer, lost $2,250,000 when a foreign country devalued its currency, gained $2,500,000 when a manufacturing plant was destroyed by a unusual and infrequent flood, lost $600,000 on the early retirement of its long-term bonds, and lost $75,000 on the sale of stock from its investment portfolio. What amount of extraordinary items (before income taxes) will Walker report in 2014?

A) $375,000
B) $600,000
C) $2,500,000
D) $4,750,000

Question 68

Nelly Company sold its cattle ranching component on June 30, 2014, for a gain of $1,000,000. From January through June, the component had sustained operating income of $300,000. The income tax rate is 35%. How should Nelly report the income and the sale on its income statement?

A) as $300,000 operating income and a $1,000,000 gain on sale of component
B) as a $1,300,000 gain in operating income
C) as a net of tax gain of $845,000 after income from continuing operations
D) as $195,000 operating income and a $650,000 gain on sale of the component shown before extraordinary items

Question 69

Exhibit 5-1 The following condensed income statement of Ranger Corporation is presented for the two years ended December 31, 2014 and 2013:



On January 1, 2014, Ranger entered into an agreement to sell one of its separate operating divisions for $2,000,000. The sale resulted in a gain on disposition of $900,000 on November 12, 2014, and qualifies as a discontinued component. This division's contribution to Ranger's reported income before income taxes for each year was as follows:

Assume an income tax rate of 30%.


-
Refer to Exhibit 5-1. In the preparation of a revised comparative income statement, Ranger should report under the caption "Discontinued Operations" for 2014 and 2013, respectively,

A) income of $140,000 and a loss of $280,000
B) income of $140,000 and a loss of $0
C) income of $200,000 and a loss of $400,000
D) a loss of $700,000 and a loss of $400,000

Question 70

Differences that currently exist between IFRS and U.S. GAAP with regard to the presentation of information on the income statement include all of the following except

A) different acceptable terminology relating to revenue items
B) depreciation measures differ when equipment has been revalued
C) different performance measures such as EBITDA are permitted under IFRS
D) differences resulting because IFRS does not require the use of accrual accounting under the historical cost framework

Question 71

Morgan Company reported the following information for the year ended December 31, 2014:

Morgan's earnings per share for 2014 was

A) $6.67
B) $6.00
C) $5.11
D) $0.15

Question 72

Which of the following is required to be disclosed, pursuant to GAAP?

A) operating income or loss from discontinued component reported on the income statement
B) a description of facts and circumstances leading up to the sale of a discontinued component within the notes of the financial statements
C) all gains or losses from sale of the component reported on the income statement or in the footnotes
D) all of these

Question 73

To be considered an extraordinary item, an event must be

A) unusual
B) unusual or infrequent
C) infrequent
D) infrequent and unusual

Question 74

Gregory Company is disposing of a component of its company. The net loss from the sale is estimated to be $600,000. Included in the $600,000 is termination pay of $100,000, which is directly associated with the decision to dispose of the component; and net losses from component asset write-downs of $400,000. Ignoring taxes, Gregory's income statement should report a loss on sale of a business component of

A) $100,000
B) $400,000
C) $500,000
D) $600,000

Question 75

Waters Edge Company operates a manufacturing plant overlooking the Chesapeake Bay. In early 2015, a hurricane destroyed the uninsured plant, resulting in $500,000 damage. Such damage had occurred previously only once in the last 110 years. Waters Edge's $500,000 loss should be reported on the income statement

A) after ordinary income, but before extraordinary items
B) as an extraordinary item
C) as an adjustment to net income
D) as a separate component of income from continuing operations

Question 76

Lester Company reported the following information for the year ended December 31, 2014:

Lester's earnings per share for 2014 was

A) $8.40
B) $10.00
C) $7.50
D) $31.00

Question 77

How should the gain or loss that is considered infrequent but not unusual in nature be disclosed?

A) separately in the income statement immediately after income from continuing operations
B) on a net-of-tax basis in the income statement immediately after income from continuing operations
C) as an extraordinary item
D) separately in the income statement as a component of income from continuing operations

Question 78

Earnings per share is an important disclosure because

A) it provides information relevant to the common stockholders
B) net income disclosed in the financial statements can fluctuate based upon management's intentions
C) it forces common and preferred stockholders to read the financial statements
D) it uses net income

Question 79

How should a material, infrequent event not meeting the criteria for an extraordinary item be disclosed in the income statement?

A) shown as a separate item in income from continuing operations
B) shown in income from continuing operations but not shown as a separate item
C) shown after income from continuing operations but before extraordinary items
D) shown after extraordinary items net of income tax but before net income

Question 80

For an event or transaction to be classified as an extraordinary item in the income statement, it should be

A) infrequent and material, but it need not be unusual in nature
B) unusual in nature and material, but it need not be infrequent
C) unusual in nature, infrequent, and material
D) unusual in nature and infrequent, but it need not be material