CHAPTER 4(1)
TRUE-FALSE—Conceptual
1. The income statement is useful in assessing the risk or uncertainty of achieving future cash flows.
2. A strength of the income statement as compared to the balance sheet is that items which cannot be measured reliably can be reported in the income statement.
3. Earnings management generally makes income statement information more useful for predicting future earnings and cash flows.
4. The transaction approach of income measurement focuses on the income-related activities that have occurred during the period.
5. Companies frequently report income tax expense separately as the last item before net income on a single-step income statement.
6. Revenues and gains increase both net income and owners’ equity.
7. The phrase “income from continuing operations” is used only when gains or losses on discontinued operations occur.
8. The primary advantage of the multiple-step format lies in the simplicity of presentation and the absence of any implication that one type of revenue or expense item has priority over another.
9. Gross profit and income from operations are reported on a multiple-step but not on a single-step income statement.
10. The accounting profession has adopted a current operating performance approach to income reporting.
11. Companies report the results of operations of a component of a business that will be disposed of separately from continuing operations.
12. Noncontrolling interest is the portion of equity (net assets) interest in a subsidiary not attributable to the parent company.
13. Discontinued operations, and unusual gains and losses are both reported net of tax in the income statement.
14. Intraperiod tax allocation relates the income tax expense of a fiscal period to the specific items that give rise to the amount of the tax provision.
15. A company that reports a discontinued operation item must report per share amounts for this item.
16. Dividends declared on common and preferred stock are subtracted from net income in the computation of earnings per share.
17. Prior period adjustments can either be added or subtracted in the Retained Earnings Statement.
18. Companies often restrict retained earnings to comply with contractual requirements or current necessity.
19. Comprehensive income includes all changes in equity during a period except those resulting from distributions to owners.
20. The components of other comprehensive income can be reported in the statement of comprehensive income.
MULTIPLE CHOICE—Conceptual
21. The major elements of the income statement are
a. revenue, cost of goods sold, selling expenses, and general expense.
b. operating section, nonoperating section, discontinued operations, and cumulative effect.
c. revenues, expenses, gains, and losses.
d. revenues, irregular items, and general expenses.
22. Which of the following is not true about the information provided in the income statement?
a. It helps in evaluating the past performance of the enterprise.
b. It provides a basis for predicting future performance.
c. It helps assess the risk or uncertainty of achieving future cash flows.
d. It helps in evaluating working capital.
23. Which of the following is false about an income statement?
a. Items that cannot be measured reliably are not reported in the income statement.
b. It is used to measure the solvency of a company.
c. Income measurement involves judgment.
d. Income numbers are affected by the accounting methods employed.
S24. Which of the following would represent the least likely use of an income statement prepared for a business enterprise?
a. Use by customers to determine a company's ability to provide needed goods and services.
b. Use by labor unions to examine earnings closely as a basis for salary discussions.
c. Use by government agencies to formulate tax and economic policy.
d. Use by investors interested in the financial position of the entity.
S25. The income statement reveals
a. resources and equities of a firm at a point in time.
b. resources and equities of a firm for a period of time.
c. net earnings (net income) of a firm at a point in time.
d. net earnings (net income) of a firm for a period of time.
26. The income statement provides investors and creditors with information to predict all of the following except the:
a. amount of future cash flows.
b. sources of future cash flows.
c. timing of future cash flows.
d. uncertainty of future cash flows.
27. Which of the following is an example of managing earnings down?
a. Changing estimated bad debts from 3 percent to 2.5 percent of sales.
b. Revising the estimated life of equipment from 10 years to 8 years.
c. Not writing off obsolete inventory.
d. Reducing research and development expenditures.
28. Which of the following is an example of managing earnings up?
a. Decreasing estimated salvage value of equipment.
b. Writing off obsolete inventory.
c. Underestimating warranty claims.
d. Accruing a contingent liability for an ongoing lawsuit.
29. What might a manager do during the last quarter of a fiscal year if she wanted to improve current annual net income?
a. Increase research and development activities.
b. Relax credit policies for customers.
c. Delay shipments to customers until after the end of the fiscal year.
d. Delay purchases from suppliers until after the end of the fiscal year.
30. What might a manager do during the last quarter of a fiscal year if she wanted to decrease current annual net income?
a. Delay shipments and sales to customers until after the end of the fiscal year.
b. Relax credit policies for customers.
c. Pay suppliers all amounts owed.
d. Delay purchases from suppliers until after the end of the fiscal year.
31. Which of the following is an advantage of the single-step income statement over the multiple-step income statement?
a. It reports gross profit for the year.
b. Expenses are classified by function.
c. It matches costs and expenses with related revenues.
d. It does not imply that one type of revenue or expense has priority over another.
32. The single-step income statement emphasizes
a. the gross profit figure.
b. total revenues and total expenses.
c. operating and non-operating expenses.
d. the various components of income from continuing operations.
33. Which of the following is an not acceptable method of presenting the income statement?
a. A single-step income statement
b. A multiple-step income statement
c. A consolidated statement of income
d. A partial statement of income.
34. Which of the following is not a generally practiced method of presenting the income statement?
a. Including prior period adjustments in determining net income
b. The single-step income statement
c. The consolidated statement of income
d. Including gains and losses from discontinued operations of a component of a business in determining net income
35. The occurrence which most likely would have no effect on 2017 net income (assuming that all amounts involved are material) is the
a. sale in 2017 of an office building contributed by a stockholder in 1986.
b. collection in 2017 of a receivable from a customer whose account was written off in 2016 by a charge to the allowance account.
c. settlement based on litigation in 2017 of previously unrecognized damages from a serious accident that occurred in 2015.
d. worthlessness determined in 2017 of stock purchased on a speculative basis in 2013.
S36. The occurrence that most likely would have no effect on 2017 net income is the
a. sale in 2017 of an office building contributed by a stockholder in 1964.
b. collection in 2017 of a dividend from an investment.
c. correction of an error in the financial statements of a prior period discovered subsequent to their issuance.
d. stock purchased in 1999 deemed worthless in 2017.
P37. Which of the following is not a selling expense?
a. Advertising expense
b. Office salaries expense
c. Freight-out
d. Store supplies consumed
P38. The accountant for the Lintz Sales Company is preparing the income statement for 2017 and the balance sheet at December 31, 2017. The January 1, 2017 merchandise inventory balance will appear
a. only as an asset on the balance sheet.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement and as a current asset on the balance sheet.
d. as an addition in the cost of goods sold section of the income statement and as a current asset on the balance sheet.
39. Which of the following is true of accounting for changes in estimates?
a. A company recognizes a change in estimate by making a retrospective adjustment to the financial statements.
b. A company accounts for changes in estimates only in the period of change, even though it affects the future periods.
c. Changes in estimates are not carried back to adjust prior years.
d. Changes in estimates are considered as errors.
40. A change in accounting principle requires that the cumulative effect of the change for prior periods be shown as an adjustment to:
a. beginning retained earnings of the earliest period presented.
b. net income of the period in which the change occurred.
c. comprehensive income for the earliest period presented.
d. stockholders’ equity of the period in which the change occurred.
41. Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business?
a. The gain or loss on disposal should be reported as an unusual gain or loss.
b. Results of operations of a discontinued component should be disclosed immediately before income from continuing operations.
c. Earnings per share from continuing operations, discontinued operations, and net income should be disclosed on the face of the income statement.
d. The gain or loss on disposal should not be segregated, but should be reported together with the results of continuing operations.
42. When a company discontinues an operation and disposes of the discontinued operation (component), the transaction should be included in the income statement as a gain or loss on disposal reported as
a. a prior period adjustment.
b. an extraordinary item.
c. an amount after continuing operations.
d. a bulk sale of plant assets included in income from continuing operations.
43. Income taxes are allocated to
a. continuing operations.
b. discontinued operations.
c. prior period adjustments.
d. balance sheet adjustments.
44. Which of the following is true about intraperiod tax allocation?
a. It arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return.
b. It is required for extraordinary items and cumulative effect of accounting changes but not for prior period adjustments.
c. Its purpose is to allocate income tax expense evenly over a number of accounting periods.
d. Its purpose is to relate the income tax expense to the items which affect the amount of tax.
45. Companies use intraperiod tax allocation for all of the following items except
a. discontinued operations.
b. other comprehensive income.
c. changes in accounting estimates.
d. income from continuing operations.
46. Which of the following items would be reported net of tax on the face of the income statement?
a. Prior period adjustment
b. Unusual gain
c. Change in realizability of receivables
d. Discontinued operations
47. Where must earnings per share be disclosed in the financial statements to satisfy generally accepted accounting principles?
a. On the face of the statement of retained earnings (or, statement of stockholders' equity.)
b. In the footnotes to the financial statements.
c. On the face of the income statement.
d. On the face of the balance sheet.
48. In calculating earnings per share, companies deduct preferred dividends from net income if:
a. they are noncumulative though not declared.
b. the dividends are declared.
c. they are convertible preferred shares.
d. they are callable preferred shares.
49. Which of the following earnings per share figures must be disclosed on the face of the income statement?
a. EPS for income before taxes.
b. The effect on EPS from unusual items.
c. EPS for gross profit.
d. EPS for income from continuing operations.
S50. Earnings per share should always be shown separately for
a. net income and gross margin.
b. net income and pretax income.
c. income from continuing operations.
d. discontinued operations items and prior period adjustments.
P51. A correction of an error in prior periods' income will be reported
In the income statement Net of tax
a. Yes Yes
b. No No
c. Yes No
d. No Yes
52. Which of the following items will not appear in the retained earnings statement?
a. Net loss
b. Prior period adjustment
c. Discontinued operations
d. Dividends
53. Which one of the following types of losses is excluded from the determination of net income in income statements?
a. Material losses resulting from transactions in the company's investments account.
b. Material losses resulting from unusual sales of assets not acquired for resale.
c. Material losses resulting from the write-off of intangibles.
d. Material losses resulting from correction of errors related to prior periods.
54. Watts Corporation made a very large arithmetical error in the preparation of its year-end financial statements by improper placement of a decimal point in the calculation of depreciation. The error caused the net income to be reported at almost double the proper amount. Correction of the error when discovered in the next year should be treated as
a. an increase in depreciation expense for the year in which the error is discovered.
b. a component of income for the year in which the error is discovered, but separately listed on the income statement and fully explained in a note to the financial statements.
c. a change in accounting principle for the year in which the error was made.
d. a prior period adjustment.
55. A company is not required to report a per share amount on the face of the income statement for which one of the following items?
a. Net income
b. Prior period adjustment
c. Continuing operations
d. Discontinued operations
56. Earnings per share data are required on the face of the
a. statement of retained earnings.
b. statement of stockholders' equity.
c. income statement.
d. balance sheet.
57. Which of the following is included in comprehensive income?
a. Investments by owners.
b. Unrealized gains on available-for-sale securities.
c. Distributions to owners.
d. Changes in accounting principles.
58. Which of the following is not an acceptable way of displaying the components of other comprehensive income?
a. Combined statement of retained earnings
b. One statement approach
c. Two statement approach
d. One and Two statement approach
59. Gains and losses identified as other comprehensive income have the same status as traditional gains and losses under
a. both the one statement and two statement approaches.
b. neither the one statement or two statement approaches.
c. the one statement approach.
d. the two statement approach.
60. Comprehensive income includes all of the following except
a. dividend revenue.
b. losses on disposal of assets.
c. investments by owners.
d. unrealized holding gains.
61. A statement of stockholders’ equity includes a column for each of the following except
a. accumulated other comprehensive income.
b. common stock.
c. net income.
d. retained earnings.
MULTIPLE CHOICE—Computational
62. Ortiz Co. had the following account balances:
Sales revenue $ 440,000
Cost of goods sold 220,000
Salaries and wages expense 30,000
Depreciation expense 60,000
Dividend revenue 12,000
Utilities expense 24,000
Rent revenue 60,000
Interest expense 36,000
Sales returns and allow. 33,000
Advertising expense 39,000
What would Ortiz report as total revenues in a single-step income statement?
a. $479,000
b. $ 70,000
c. $472,000
d. $440,000
63. Ortiz Co. had the following account balances:
Sales revenue $ 440,000
Cost of goods sold 220,000
Salaries and wages expense 30,000
Depreciation expense 60,000
Dividend revenue 12,000
Utilities expense 24,000
Rent revenue 60,000
Interest expense 36,000
Sales returns and allow. 33,000
Advertising expense 39,000
What would Ortiz report as total expenses in a single-step income statement?
a. $421,000
b. $442,000
c. $409,000
d. $189,000
64. For Mortenson Company, the following information is available:
Cost of goods sold $390,000
Dividend revenue 15,000
Income tax expense 36,000
Operating expenses 138,000
Sales revenue 600,000
In Mortenson’s single-step income statement, gross profit
a. should not be reported.
b. should be reported at $51,000.
c. should be reported at $210,000.
d. should be reported at $225,000.
65. For Mortenson Company, the following information is available:
Cost of goods sold $390,000
Dividend revenue 15,000
Income tax expense 36,000
Operating expenses 138,000
Sales revenue 600,000
In Mortenson’s multiple-step income statement, gross profit
a. should not be reported
b. should be reported at $51,000.
c. should be reported at $210,000.
d. should be reported at $225,000.
66. The following information was extracted from the 2017 financial statements of Max Company:
Income from continuing operations before income tax $705,000
Selling and administrative expenses 480,000
Income from continuing operations 495,000
Gross profit 1,350,000
The amount reported for other expenses and losses is
a. $210,000
b. $15,000.
c. $165,000.
d. $225,000.
67. Gross billings for merchandise sold by Lang Company to its customers last year amounted to $12,720,000; sales returns and allowances were $370,000, sales discounts were $175,000, and freight-out was $140,000. Net sales last year for Lang Company were
a. $12,720,000.
b. $12,350,000.
c. $12,175,000.
d. $12,035,000.
68. If plant assets of a manufacturing company are sold at a gain of $1,800,000 with related taxes of $540,000, and the gain is not considered unusual or infrequent, the income statement for the period would disclose these effects as
a. a gain of $1,800,000 and an increase in income tax expense of $540,000.
b. operating income net of applicable taxes, $1,260,000.
c. a prior period adjustment net of applicable taxes, $1,260,000.
d. a discontinued operations gain net of applicable taxes, $1,260,000.
69. At Ruth Company, events and transactions during 2017 included the following. The tax rate for all items is 30%.
(1) Depreciation for 2015 was found to be understated by $150,000.
(2) A strike by the employees of a supplier resulted in a loss of $125,000.
(3) The inventory at December 31, 2015 was overstated by $200,000.
The effect of these events and transactions on 2017 income from continuing operations net of tax would be
a. ($87,500).
b. ($192,500).
c. ($332,500).
d. ($245,000).
70. At Ruth Company, events and transactions during 2017 included the following. The tax rate for all items is 30%.
(1) Depreciation for 2015 was found to be understated by $120,000.
(2) A strike by the employees of a supplier resulted in a loss of $100,000.
(3) The inventory at December 31, 2015 was overstated by $160,000.
(4) A disposal of a component of the business resulted in a $2,000,000 loss.
The effect of these events and transactions on 2017 net income net of tax would be
a. ($70,500).
b. ($1,470,000).
c. ($1,554,000).
d. ($1,666,000).
