Deck 5: Statements of Net Income and Comprehensive Net Income

Question 1

Which of the following would not be included in net income?

A) sales from products and services that occurred during the accounting period
B) an unrealized gain on an available-for-sale debt investment as of the end of the accounting period
C) wages and salaries expense incurred during the accounting period
D) a gain from the disposal of equipment that occurred on the last day of the accounting period

Answer 1

B

Question 2

Which of the following income statement items is considered to be transitory?

A) promotional costs for a new product
B) sales revenue from the general public
C) interest expense on short-term loans
D) income from discontinued operations

Answer 2

D

Question 3

Elements of other comprehensive income are primarily permanent in nature.

Answer 3

False

Question 4

Which of the following income statement items is considered to be permanent?

A) gains on disposal of equipment
B) impairment losses
C) interest expense
D) discontinued operations

Question 5

Which statement is true about the computation of net income and comprehensive income?

A) They are the same under either reporting alternative.
B) The one statement format provides a higher net income than the two consecutive statements format.
C) The two consecutive statements format provides a higher net income than the one statement format.
D) Net income always equals comprehensive income under the one statement format.

Question 6

In what ways is the income statement useful to users?

A) helps users evaluate past performance
B) helps users predict future results
C) helps users assess the risk of future cash flows
D) all of the above

Question 7

Comprehensive income is comprised of only elements explicitly excluded from net income.

Question 8

The two parts that compose comprehensive income are operating income and net income.

Question 9

What is a limitation of the income statement?

A) It has no predictive value.
B) It requires extensive judgement and estimation in order to draw conclusions.
C) It does not allow users to judge risk.
D) It only reports financial standing as of a point in time.

Question 10

How does the fact that accounting standards allow managers to exercise their professional judgment when making accounting policy decisions constitute a limitation of the income statement?

Question 11

In what ways do the accounting standards allow companies to report comprehensive income in the financial statements?

Question 12

Other comprehensive income is comprised of elements explicitly excluded from net income.

Question 13

The "big bath" earnings management technique involves increasing an expected net loss so as to report an even larger net loss.

Question 14

Most elements of operating income are permanent in nature.

Question 15

Which of the following would be included in net income?

A) an unrealized gain on an available-for-sale debt investment as of the end of the accounting period
B) a gain from the disposal of equipment that occurred on the last day of the accounting period
C) an unrealized gain as a result of a foreign currency translation adjustment
D) an unrealized loss on an available-for-sale debt investment as of the end of the accounting period

Question 16

Which of the following is considered to be a limitation of income statements?

A) Income statements depend on accounting methods selected.
B) Income statements evaluate past performance.
C) Income statements assess uncertainties of achieving future cash flows.
D) Income statements predict future performance.

Question 17

Morton Company has the following transactions in the current year. Assuming that all of the transactions are material, which of them will most likely have no effect on current year net income?

A) advance in technology that renders certain inventory items obsolete
B) retirement of callable bonds at a premium
C) sale of used equipment that had been fully depreciated in prior years
D) increase in the fair value of certain available-for-sale securities held as an investment

Question 18

Comprehensive income may be reported in the financial statements in either of two formats.

Question 19

The "cookie jar reserves" earnings management technique involves increasing earnings in the current period so as to increase managers' compensation.

Question 20

Which of the following is considered to be a characteristic of the usefulness of income statements?

A) Income statements require judgment.
B) Income statements evaluate past performance.
C) Income statements depend on the accounting methods selected.
D) Income statements exclude unreliable information.

Question 21

Identify and describe the two primary factors that impact earnings quality.

Question 22

Which of the following income statement elements is an economic inflow that occurs from primary operations?

A) revenue
B) comprehensive income
C) gain
D) net income

Question 23

Which of the following transactions will most likely result in a loss reported on the income statement?

A) A shoe store acquires a large supply of shoe polish from a supplier going through bankruptcy.
B) A manufacturer pays a company a fee to license that company's proprietary technology.
C) A bank pays more interest than expected on customers' savings accounts.
D) A grocery store sells marketable securities after a decline in value.

Question 24

Which of the following is not usually a motivating factor for management to manage earnings?

A) present earnings in a smooth and upward trend
B) to meet desired profit goals
C) to meet a regulatory requirement to manage earnings
D) to avoid reporting a loss for a particular accounting period

Question 25

Which of the following is an earnings management technique that involves increasing a current loss to show a future increase in net income?

A) inversion
B) comprehensive counting
C) big bath
D) cookie jar reserves

Question 26

U.S. GAAP requires firms to classify revenues and expenses using the functional approach.

Question 27

Each of the following is a motivation to engage in earnings management except ________.

A) beat benchmarks
B) avoid reporting a loss
C) separate other comprehensive income from net income
D) present a smooth, upwards trend in earnings

Question 28

According to a survey of auditors, what is the most common approach to earnings management by management?

A) manipulate revenues and gains
B) manipulation of expenses and losses
C) exploit business combinations
D) engage in fraudulent activity

Question 29

The "cookie jar reserves" earnings management technique involves ________.

A) increasing earnings in the current period in anticipation of significant future decreases
B) decreasing earnings in the current period in anticipation of significant future increases in earnings
C) increasing earnings so as to increase managers' compensation
D) increasing losses in the current period to allow the firm to show increased net losses in the future

Question 30

Which of the following is a classification of expenses using the functional approach?

A) administration expense
B) cost of raw materials used
C) supplies expense
D) salary costs

Question 31

Which of the following statements about earnings quality is false?

A) Earnings quality is enhanced when managers are afforded discretion and judgment in applying accounting standards.
B) Permanent earnings result in higher earnings quality, while transitory earnings result in lower earnings quality.
C) Earnings quality is of considerable interest not only to investors and creditors but also to auditors, regulators, and academics.
D) Earnings quality captures the degree to which reported income provides financial statement users with useful information for predicting future firm performance.

Question 32

Which of the following income statement elements is an economic outflow that occurs from primary operations?

A) loss
B) expense
C) revenue
D) deficit

Question 33

Which of the following is a classification of expenses using the nature approach?

A) cost of goods sold
B) payroll costs
C) sales expense
D) administration expense

Question 34

Compare and contrast two earnings management techniques.

Question 35

The "nature approach" to classifying expenses refers to classification by source such as salary costs or rent expense.

Question 36

The four income statement elements are gains, losses, revenues, and expenses.

Question 37

Which of the following is considered a transitory item when assessing earnings quality?

A) gains on disposal of long-lived assets
B) cost of goods sold
C) selling expenses
D) sales

Question 38

Which of the following is considered a permanent item when assessing earnings quality?

A) a gain of the disposal of a truck
B) a loss on the sale of a machine which had been used in operations
C) general and administrative expenses of the corporate headquarters
D) a gain on discontinued operations

Question 39

In what ways is management motivated to engage in earnings management?

Question 40

What are the most common approaches management uses to manipulate earnings?

Question 41

Which of the following items does IFRS require to be presented on the income statement that U.S. GAAP does not require?

A) litigation settlements
B) finance costs
C) after-tax profit or loss on discontinued operations
D) restructuring costs

Question 42

IFRS requires companies to report specific items on the income statement including finance costs.

Question 43

The single-step income statement format combines all revenues and expenses into a single category and all gains and losses into another single category.

Question 44

Which of the following items does IFRS require to be disclosed but not necessarily presented on the income statement?

A) litigation settlements
B) finance costs
C) turnover
D) income of associates

Question 45

Which of the following is not a drawback of the single-step income statement?

A) It does not separate operating and non-operating items.
B) It combines revenues and gains without classification.
C) It does not classify expenses by function.
D) It misstates net income due to oversimplification.

Question 46

How are expenses similar to losses and how are they different?

Question 47

Which section of the multi-step income statement reports revenues and expenses related to secondary operations of the entity?

A) discontinued operations section
B) secondary section
C) non-operating section
D) operating section

Question 48

IFRS requires companies to present specific items on the income statement including write-downs of inventories and litigation settlements.

Question 49

Which of the following items would not appear in the operating section of the multiple-step income statement of a manufacturer?

A) sales of products
B) the cost of goods sold during the period
C) depreciation expense of the machinery used on the assembly line
D) the gain or loss on the disposal of equipment used on the assembly line

Question 50

Which of the following is not a subtotal on the multi-step income statement?

A) interest expense
B) gross profit
C) operating income
D) income from continuing operations before tax

Question 51

Key performance measures on the statement of net income include gross profit and net assets, among others.

Question 52

Companies use ________ income statements when a large number of line items distracts the user from identifying key measures and relationships.

A) comprehensive
B) condensed
C) single-step
D) multi-step

Question 53

When a large number of line items limits the usefulness of the income statement, companies use a single-step income statement.

Question 54

How are revenues similar to gains and how are they different?

Question 55

Approximately 15% of reporting entities use a single-step income statement.

Question 56

Which of the following is the key performance measure reported on the income statement that is typically presented last in sequence?

A) earnings per share
B) income from continuing operations
C) net income
D) operating income

Question 57

A sporting goods retailer sells some of its cash registers. Which of the following would be a false statement?

A) If it sells the registers for more than their book value, then this transaction results in a gain.
B) If it sells the registers for less than their book value, it would be an expense added to cost of goods sold.
C) The inflow from the sale of the cash registers would only be classified as revenue if the retailer were in the business of selling cash registers.
D) In no cases would the inflow from the sale of cash registers be classified as a revenue.

Question 58

IFRS requires companies to disclose write-downs of inventory or of property, plant, and equipment if they are not presented on the income statement.

Question 59

Which of the following is the key performance measure reported on the income statement that is typically presented first in sequence?

A) sales revenue
B) income from continuing operations
C) gross profit
D) operating income

Question 60

Key performance measures on the statement of net income include operating income and income from continuing operations, among others.

Question 61

Under U.S. GAAP, identify the six key performance measure subtotals on the statement of net income.

Question 62

Which of the following is not typically included in the determination of income from continuing operations?

A) other comprehensive income
B) income tax provision
C) non-operating items
D) earnings before interest and taxes

Question 63

On the income statement, the line item that comes before income tax expense is called income from continuing operations.

Question 64

Operating income is gross profit less all operating expenses and income taxes.

Question 65

On the income statement, ________ is gross profit less all operating expenses.

A) retained earnings
B) net income
C) income from continuing operations
D) operating income

Question 66

The following data include all the elements from Tuche Millinery's income statement: $$\begin{array} { l r } \text { Administrative Expense } & \$ 220 \\\text { Cost of Goods Sold } & 261 \\\text { Gain on Sale of Securities } & 43 \\\text { Income Tax Expense } & 51 \\\text { Loss on Discontinued Operations } & 38 \\\text { Loss on Disposal of Equipment } & 86 \\\text { Revenue } & 878 \\\text { Selling Expense } & 124\end{array}$$ What is the amount of gross profit for Tuche Millinery?

A) $273
B) $493
C) $617
D) $397

Question 67

Which of the following items would not appear in the operating section of the multiple-step income statement of a retailer?

A) sales of products
B) the cost of goods sold during the period
C) depreciation expense related to store equipment such as cash registers and store fixtures
D) the gain or loss on the disposal of store equipment used in operations

Question 68

The following data include all the elements from Cambridge Company's income statement: $$\begin{array} { l r } \text { Administrative Expense } & \$ 873 \\\text { Cost of Goods Sold } & 3,615 \\\text { Gain on Sale of Securities } & 623 \\\text { Income Tax Expense } & 1,234 \\\text { Loss on Discontinued Operations } & 1,229 \\\text { Loss on Disposal of Equipment } & 237 \\\text { Revenue } & 8,771 \\\text { Selling Expense } & 1,425\end{array}$$ What is the amount of income from continuing operations for Cambridge Company?

A) $3,244
B) $2,621
C) $2,010
D) $3,481

Question 69

Truko, Inc. provided the following partial trial balance for the current year. Prepare a single-step income statement for the year ended December 31. Truko is subject to a 40% income tax rate.
Truko Inc.
Partial Trial Balance (Selected Accounts)
For the Year Ended December 31
$$\begin{array} { l r r } \text { Accounts } & \text { Debit } & \text { Credit } \\\text { Dividends } & \$ 2,460 & \\\text { Sales } & & \$ 225,400 \\\text { Dividend Income } & & 3,830 \\\text { Interest Income } & & 1,450 \\\text { Gain on Disposal of Plant Assets } & & 14,810 \\\text { Unrealized Gain on Trading Investments } & & 7,270 \\\text { Cost of Goods Sold } & 90,100 & \\\text { Office Supplies Expense } & 4,500 & \\\text { Sales Salaries Expense } & 8,390 & \\\text { Selling Expenses } & 11,210 & \\\text { Accounting and Legal Fees - General Expense } & 2,400 & \\\text { Advertising Expense } & 6,660 & \\\text { Office Salaries Expense } & 21,480 & \\\text { Depreciation Expense-General Expense } & 18,600 & \\\text { Interest Expense } & 2,570 & \\\text { Loss on Asset Impairment } & 1,840\end{array}$$

Question 70

The following data include all the elements from Tuche Millinery's income statement: $$\begin{array} { l r } \text { Administrative Expense } & \$ 229 \\\text { Cost of Goods Sold } & 259 \\\text { Gain on Sale of Securities } & 46 \\\text { Income Tax Expense } & 53 \\\text { Loss on Discontinued Operations } & 38 \\\text { Loss on Disposal of Equipment } & 86 \\\text { Revenue } & 866 \\\text { Selling Expense } & 124\end{array}$$ What is the amount of operating income for Tuche Millinery?

A) $607
B) $378
C) $254
D) $197

Question 71

The following data include all the elements from Cambridge Company's income statement: $$\begin{array} { l r } \text { Administrative Expense } & \$ 872 \\\text { Cost of Goods Sold } & 3,604 \\\text { Gain on Sale of Securities } & 623 \\\text { Income Tax Expense } & 1,234 \\\text { Loss on Discontinued Operations } & 1,229 \\\text { Loss on Disposal of Equipment } & 237 \\\text { Revenue } & 8,741 \\\text { Selling Expense } & 1,425\end{array}$$ What is the amount of gross profit for Cambridge Company?

A) $3,903
B) $1,606
C) $4,526
D) $5,137

Question 72

Which of the following is typically included in the determination of operating income?

A) other comprehensive income
B) provision for income tax
C) gross profit
D) restructuring charges

Question 73

Which of the following is typically included in the determination of income from continuing operations?

A) other comprehensive income
B) non-operating gains and losses
C) gain on disposal of discontinued segment
D) reserved retained earnings

Question 74

Truko, Inc. provided the following partial trial balance for the current year. Prepare a multi-step income statement for the year ended December 31. Truko is subject to a 40% income tax rate.
Truko, Inc.
Partial Trial Balance (Selected Accounts)
For the year ended December 31
$$\begin{array} { l r r } \text { Accounts } & \text { Debit } & \text { Credit } \\\text { Dividends } & \$ 2,460 & \\\text { Sales } & & \$ 225,400 \\\text { Dividend Income } & & 3,830 \\\text { Interest Income } & & 1,450 \\\text { Gain on Disposal of Plant Assets } & & 14,810 \\\text { Unrealized Gain on Trading Investments } & & 7,270 \\\text { Cost of Goods Sold } & 90,100 & \\\text { Office Supplies Expense - General Expense } & 4,500 & \\\text { Sales Salaries Expense } & 8,390 & \\\text { Selling Expenses } & 11,210 & \\\text { Accounting and Legal Fees - General Expense } & 2,400 & \\\text { Advertising Expense } & 6,660 & \\\text { Office Salaries Expense-Admin. Expense } & 21,480 & \\\text { Depreciation Expense-General Expense } & 18,600 & \\\text { Interest Expense } & 2,570 & \\\text { Loss on Asset Impairment } & 1,840 &\end{array}$$

Question 75

Sales minus cost of goods sold equals gross profit.

Question 76

Which of the following is typically included in the income tax provision?

A) deferred income tax
B) state and local income tax
C) federal income tax on gain from discontinued operations
D) federal, state, and local payroll tax

Question 77

The following data include all the elements from Tuche Millinery's income statement: $$\begin{array} { l r } \text { Administrative Expense } & \$ 226 \\\text { Cost of Goods Sold } & 251 \\\text { Gain on Sale of Securities } & 47 \\\text { Income Tax Expense } & 56 \\\text { Loss on Discontinued Operations } & 38 \\\text { Loss on Disposal of Equipment } & 86 \\\text { Revenue } & 865 \\\text { Selling Expense } & 124\end{array}$$ What is the amount of income from continuing operations for Tuche Millinery?

A) $264
B) $388
C) $490
D) $169

Question 78

The following data include all the elements from Cambridge Company's income statement: $$\begin{array} { l r } \text { Administrative Expense } & \$ 872 \\\text { Cost of Goods Sold } & 3,627 \\\text { Gain on Sale of Securities } & 623 \\\text { Income Tax Expense } & 1,234 \\\text { Loss on Discontinued Operations } & 1,229 \\\text { Loss on Disposal of Equipment } & 237 \\\text { Revenue } & 8,766 \\\text { Selling Expense } & 1,425\end{array}$$ What is the amount of operating income for Cambridge Company?

A) $2,842
B) $5,139
C) $3,228
D) $3,465

Question 79

The income tax provision includes all income taxes from every source and every cause such as discontinued operations.

Question 80

Why do companies issue condensed income statements?