Deck 4: Income Statement and Related Information

Question 1

The nature-of-expense method identifies the major cost drivers and helps users to assess whether these amounts are appropriate for the revenue generated.

Answer 1

False

Question 2

Both revenues and gains increase both net income and equity.

Answer 2

True

Question 3

Intraperiod tax allocation relates the income tax expense of the period to the specific items that give rise to the amount of the tax provision.

Answer 3

True

Question 4

The income statement presents subtotals for gross profit, income before continuing operations, income before income tax, and net income.

Question 5

The transaction approach of income measurement focuses on the income-related activities that have occurred during the period.

Question 6

Discontinued operations and gains and losses are both reported net of tax in the income statement.

Question 7

A strength of the income statement as compared to the statement of financial position is that items that cannot be measured reliably can be reported in the income statement.

Question 8

Income before income taxes is computed by deducting interest expense from income from operations.

Question 9

Earnings management generally makes income statement information more useful for predicting future earnings and cash flows.

Question 10

Companies only restrict retained earnings to comply with contractual requirements or current necessity.

Question 11

Prior period adjustments can either be added or subtracted in the Retained Earnings Statement.

Question 12

A company that reports a discontinued operation has the option of reporting per share amounts for this item.

Question 13

Comprehensive income can be reported in a statement of changes in equity.

Question 14

Income from operations represents a company's results before any gain or loss on discontinued operations.

Question 15

Comprehensive income includes all changes in equity during a period except those resulting from distributions to owners.

Question 16

A company recognizes a change in estimate by making a retrospective adjustment to the financial statements.

Question 17

The IASB takes the position that both revenues and expenses and other income and expense should be reported as part of income from operations.

Question 18

Companies report the results of operations of a component of a business that will be disposed of separately from continuing operations.

Question 19

The income statement is useful for helping to assess the risk or uncertainty of achieving future cash flows.

Question 20

Companies frequently report income tax as the last item before net income on the income statement.

Question 21

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 condensed income statement.
C) The consolidated income statement.
D) Including gains and losses from discontinued operations of a component of a business in determining net income.

Question 22

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 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.

Question 23

If a company prepares a consolidated income statement, IFRS requires that net income be reported for

A) the majority interest only.
B) the minority interest only.
C) both the majority interest and the minority interest.
D) as a single amount only.

Question 24

Which of the following equations expresses the definition of "income"?

A) Income = Revenues - Expenses
B) Income = (Revenues + Gains) - (Expenses + Losses)
C) Income = Revenues + Gains
D) Income = Gains - Losses

Question 25

IFRS requires that a single amount be disclosed within the income statement for

A) the post-tax profit/loss on discontinued operations and the pre-tax gain/loss on the disposal of discontinued operational assets.
B) the pre-tax profit/loss on discontinued operations and the post-tax gain/loss on the disposal of discontinued operational assets.
C) the pre-tax profit/loss on discontinued operations and the pre-tax gain/loss on the disposal of discontinued operational assets.
D) the post-tax profit/loss on discontinued operations and the post-tax gain/loss on the disposal of discontinued operational assets.

Question 26

The definition of expenses includes

A) losses only.
B) expenses and losses.
C) expenses only.
D) expenses, losses and unrealized losses on available-for-sale securities.

Question 27

In which section of the income statement is interest expense reported?

A) Gross profit.
B) Income from operations.
C) Income before income taxes.
D) Non-controlling interest.

Question 28

Investors and creditors use income statement information for each of the following
Except to

A) evaluate the future performance of the company.
B) provide a basis for predicting future performance.
C) help assess the risk and uncertainty of achieving future cash flows.
D) All of these answers are correct.

Question 29

The income statement provides investors and creditors information that helps them predict

A) the amounts of future cash flows.
B) the timing of future cash flows.
C) the uncertainty of future cash flows.
D) All of these answers are correct.

Question 30

The income statement information would help in which of the following tasks?

A) Evaluate the liquidity of a company.
B) Evaluate the solvency of a company.
C) Estimate future cash flows.
D) Estimate future financial flexibility.

Question 31

Which of the following situations involving different accounting methods or accounting estimates results in comparison difficulties between companies?

A) Estimated useful lives for depreciable assets.
B) Inventory methods.
C) Estimates of bad debts.
D) All of the above.

Question 32

Information in the income statement helps users to

A) evaluate the past performance of the enterprise.
B) provide a basis for predicting future performance.
C) help assess the risk or uncertainty of achieving future cash flows.
D) All of these.

Question 33

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.

Question 34

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.

Question 35

Which method of income measurement is used in the preparation of the income statement?

A) Capital maintenance approach.
B) Transaction approach.
C) Cash-flow approach.
D) Income components approach.

Question 36

The non-controlling interest section of the income statement is shown

A) below net income.
B) below income from operations.
C) above other income and expenses.
D) above income tax.

Question 37

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.

Question 38

Which of the following is not required to be presented on the income statement
Under IFRS?

A) Revenue.
B) Other gains/losses.
C) Finance costs.
D) Tax expense.

Question 39

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) All of these.

Question 40

The planned timing of revenues, expenses, gains, and losses to smooth out bumps in earnings is the definition of

A) quality of earnings.
B) earnings management.
C) smoothing of earnings.
D) earnings averaging.

Question 41

Which of the following would appear first in a statement of retained earnings?

A) Net income.
B) Prior period adjustment.
C) Cash dividends.
D) Share dividends.
^P67. A correction of an error in prior periods' income will be reported

Question 42

Prior years income statements are not restated for

A) changes in accounting principle.
B) changes in estimates.
C) corrections of errors.
D) All of these answer choices are correct.

Question 43

A change in accounting principle requires what kind of adjustment to the financial statements?

A) Current period adjustment.
B) Prospective adjustment.
C) Retrospective adjustment.
D) Current and prospective adjustment.

Question 44

The earnings per share computation is not required for

A) Net income.
B) Gain on disposal of discontinued operation, net of tax.
C) Income from continuing operations.
D) Income from operations.

Question 45

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 other income item.
B) Results of operations of a discontinued component should be disclosed immediately below income from operations.
C) Earnings per share from both continuing 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.

Question 46

Companies use intraperiod tax allocation for all of the following items except

A) discontinued operations.
B) prior period adjustments.
C) changes in accounting estimates.
D) income from continuing operations.

Question 47

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 the 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.

Question 48

Given the following income statement line items:
Income from operations
Income before income taxes
Income from continuing operations
Income from discontinued operations
Net income
How many earnings per share amounts are required to be disclosed?

A) 5
B) 4
C) 3
D) 2

Question 49

Which of the following is not an acceptable way of displaying the components of other comprehensive income?

A) Combined statement of retained earnings.
B) Second income statement.
C) Combined statement of comprehensive income.
D) All of the above are acceptable.

Question 50

Which of the following is included in comprehensive income?

A) Investments by owners.
B) Unrealized gains on non-trading equity securities.
C) Distributions to owners.
D) Changes in accounting principles.

Question 51

Undeclared dividends are deducted from net income in the earnings per share computation for which type of preference shares?

A) Non-cumulative only.
B) Cumulative only.
C) Neither non-cumulative nor cumulative.
D) Both non-cumulative and cumulative.

Question 52

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) an other expense item for the year in which the error was made.
D) a prior period adjustment.

Question 53

In 2019, Milford Corporation determined that it overstated salaries payable and salaries expense by $20,000 in 2018. In 2019, which of the following accounts will have to be credited to correct this error?

A) Salaries and Wages Payable.
B) Salaries and Wages Expense.
C) Retained Earnings.
D) Income Summary.

Question 54

Changes in estimates affect reported amounts

A) retrospectively only.
B) prospectively only.
C) currently and prospectively.
D) currently and retrospectively.

Question 55

Which of the following does not appear on a statement of retained earnings?

A) Net loss.
B) Prior period adjustments.
C) Preference share dividends.
D) Other comprehensive income.

Question 56

Earnings per share relate to

A) preference shares only.
B) ordinary shares only.
C) both preference and ordinary shares.
D) neither preference nor ordinary shares.

Question 57

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 for the earliest period presented.
B) net income for the period in which the change occurred.
C) comprehensive income for the earliest period presented.
D) stockholders' equity for the period in which the change occurred.

Question 58

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 other income and expense item.
C) an amount after continuing operations and before net income.
D) a bulk sale of plant assets included in income from continuing operations.
^S56. Gains or losses on the disposal of investments should be shown in the income statement

Question 59

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.

Question 60

Income taxes are allocated to

A) continuing operations.
B) discontinued operations.
C) prior period adjustments.
D) All of these answers are correct.

Question 61

Under IFRS other comprehensive income must be displayed (reported) in

A) the equity section of the statement of financial position.
B) a second income statement.
C) the comprehensive income statement or the income statement and comprehensive income statement.
D) the retained earnings the statement.

Question 62

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.

Question 63

Comprehensive income includes all of the following, except

A) revenues and gains.
B) expenses and losses.
C) preference share dividends.
D) unrealized gains and losses on non-trading equity securities.