Deck 3: Income Statement and Statement of Stockholders Equity

Question 1

Earnings reported on the income statement is the same as cash generated during the accounting period.

Answer 1

False

Question 2

Selling and administrative expenses include such items as advertising, salaries, and interest expense.

Answer 2

False

Question 3

The FIFO method of inventory valuation generally results in the matching of current costs and current revenues, especially during inflation.

Answer 3

False

Question 4

In general, higher quality earnings result when sales volume increases and sales prices increase with inflation.

Question 5

Impairment charges are the expenses recognized to record a decline in value of a long-term asset.

Question 6

Since other income or expense items are not part of daily operations there is no need to analyze these accounts.

Question 7

Users of financial statements need to distinguish between earnings increasing due to core operations versus items such as tax rate deductions.

Question 8

If the cost of goods sold percentage increases, this means that the cost to acquire products has increased.

Question 9

The amount and trend of each operating expense should be evaluated as well as its relationship to the volume of activity that is relevant to the expense.

Question 10

The effective tax rate is calculated by dividing operating profit by income tax expense.

Question 11

The common size income statement expresses each income statement item as a percentage of net sales.

Question 12

The terms income, earnings, and profit are used interchangeably.

Question 13

Gross profit margin does not impact operating profit margin.

Question 14

Operating profit measures the overall performance of the company's operations separate from items that are not directly related to operations.

Question 15

The gross profit margin and cost of goods sold percentage are complements of each other and always add to 100%.

Question 16

Gross profit is equal to net sales plus cost of goods sold.

Question 17

A multiple-step income statement presents several intermediate profit measures.

Question 18

Sales volume changes in firms with high fixed costs will result in stable gross profit margins.

Question 19

The equity method of accounting should be used when the parent company owns 100% of the voting stock in its subsidiaries.

Question 20

Use of the equity method somewhat distorts earnings in the sense that income is recognized even though no cash may ever be received.

Question 21

What can be found on an income statement?

A) Assets, revenues and expenses.
B) Revenues, expenses and net profit (loss).
C) Revenues, expenses, and stockholders' equity.
D) Assets, liabilities and stockholders' equity.

Question 22

The statement of stockholders' equity details the transactions that affect all balance sheet accounts during an accounting period.

Question 23

What are the two basic formats of the income statement?

A) Multiple-step and single-step.
B) Cash basis and single-step.
C) Accrual basis and single-step.
D) Accrual basis and multiple-step.

Question 24

Of what value is the calculation of gross profit margin?

A) The gross profit margin helps the analyst assess the capital structure of the firm.
B) The gross profit margin allows the analyst to determine if the firm has been affected by inflation.
C) The gross profit margin indicates the profitability of a firm after considering all operating expenses.
D) The gross profit margin is the first step of profit measurement indicating how much profit the firm generates after deducting cost of goods sold.

Question 25

When will volume changes cause volatility in the gross profit margin?

A) If cost of goods sold includes fixed costs which do not vary proportionately with volume changes.
B) In industries with little capital.
C) In industries having no fixed costs.
D) If cost of goods sold includes costs that vary proportionately with volume changes.

Question 26

Earnings per common share is the net cash available to common stockholders for each share of stock owned.

Question 27

Which of the following is not an acceptable method to report total comprehensive income?

A) On the face of the income statement.
B) In a separate statement of comprehensive income.
C) In the equity section of the balance sheet.
D) In the statement of stockholders' equity.

Question 28

Which of the following statements is true?

A) Only service companies report both cost of goods sold and gross profit.
B) Cost of goods sold is the largest expense item for many firms.
C) Cost of goods sold is not affected by the choice of inventory valuation method.
D) Cost of goods sold equals gross profit.

Question 29

What could be the cause of an increase in a firm's sales number?

A) The firm has decreased prices.
B) Fewer units of product have been sold.
C) The firm has increased prices and volume of sales.
D) The firm has decreased prices and volume of sales.

Question 30

How is it possible for a U.S. firm to have an effective tax rate that is less than the U.S. federal statutory tax rate?

A) The firm has expenses that are not deductible for tax purposes.
B) Tax rates in foreign countries where the firm operates are higher.
C) Tax rates in foreign countries where the firm operates are lower.
D) It is not possible for a firm to have an effective tax rate different from the U.S. federal statutory tax rate.

Question 31

What is another term frequently used when referring to operating profit?

A) Earnings before interest and taxes (EBIT).
B) Earnings before interest, taxes, depreciation and amortization (EBITDA).
C) Net profit.
D) Earnings before interest (EBI).

Question 32

Which of the items below would be analyzed separate from operating profit?

A) Salaries, interest expense, equity losses.
B) Equity earnings, discontinued operations, interest income.
C) Research and development, dividend income, interest expense.
D) Advertising, cost of goods sold, selling and administrative expenses.

Question 33

Why is the common-size income statement valuable to the analyst?

A) The common-size income statement shows the relative magnitude of revenues and expenses to total assets.
B) The common-size income statement allows the analyst to compare the firm to itself from year-to-year, but not to its competitors.
C) The common-size income statement shows the relative magnitude of revenues and expenses relative to profits.
D) The common-size income statement shows the relative magnitude of expenses relative to net sales.

Question 34

Total comprehensive income must now be disclosed on the face of the income statement.

Question 35

Which of the following statements is false?

A) It is important to analyze operating expenses over which management exercises discretion and that have considerable impact on the firm's profitability.
B) Impairment charges do not need to be analyzed since they are generally a non-recurring expense.
C) Operating expenses should be tracked in terms of trends, absolute amounts, relationship to sales, and relationship to industry competitors.
D) Operating expenses can be easily analyzed by preparing a common-size income statement.

Question 36

Changes in the number of common stock shares outstanding will impact the computation of earnings per share.

Question 37

Which items below would be classified as operating expenses?

A) Depreciation, capital leases, operating profit.
B) Interest expense, interest income, rent expense.
C) Accounts payable, lease payments, depreciation.
D) Advertising, selling and administrative, repairs and maintenance.

Question 38

Discontinued operations, extraordinary items, and gains or losses on sales of plant assets are special items that must be disclosed separately on the income statement.

Question 39

How should gross profit margin be analyzed for firms having more than one revenue source?

A) The overall gross profit margin should be calculated for all revenue sources.
B) Gross profit margin cannot be analyzed if a firm has multiple revenue sources.
C) A separate gross profit margin for each revenue source should be calculated.
D) The gross profit margins from each revenue source should be calculated and then averaged.

Question 40

Which of the following statements is true?

A) Equity earnings is an internal source of cash.
B) Equity earnings are recorded when investment ownership is over 50%.
C) Equity earnings may never result in the actual receipt of cash.
D) Equity earnings are recorded when investment ownership is 100%.

Question 41

What information can be found on a statement of shareholders' equity?

A) Details of assets and liabilities.
B) A reconciliation of beginning to ending cash..
C) Detail of changes in equity accounts.
D) Assets = Liabilities + Stockholders' Equity.

Question 42

How is a firm's average income tax rate calculated?

A) Income taxes divided by earnings before income taxes.
B) Income taxes divided by net income.
C) Income taxes divided by sales.
D) Income taxes divided by gross profit.

Question 43

What is the required reporting for discontinued operations?

A) The results of discontinued operations should be reported as an extraordinary item.
B) The gain or loss on the disposal should be reported in comprehensive income.
C) The operating results of discontinued operations should be reported as part of continuing operations and any gain or loss on disposal should be disclosed separately from continuing operations.
D) The operating results of discontinued operations should be reported separately from continuing operations and any gain or loss on disposal should be also be disclosed separately from continuing operations.