Deck 4: Income Statement

Question 1

Andromeda Industries had 300,000 shares of common stock with a $3 par value and retained earnings of $180,000 at January 1,2011.In 2011,the stock was split 3 for 1.In 2010,earnings per share were $1.80.Which of the following would not result from the stock split?

A)The new shares would total 900,000.
B)The total amount in the capital stock account would remain the same.
C)The par value would become $1.
D)Retained earnings would be reduced.
E)The earnings per share for 20 years prior to the split would be reduced.

Answer 1

D

Question 2

Which of the following will not affect retained earnings?

A)Declaration of a stock dividend
B)Payment of a cash dividend previously disclosed
C)Adjustment for an error of a prior period
D)Net income
E)Net loss

Answer 2

B

Question 3

Gross profit is the difference between:

A)net income and operating income.
B)revenues and expenses.
C)sales and cost of goods sold.
D)income from continuing operations and discontinued operations.
E)gross sales and sales discounts.

Answer 3

C

Question 4

Which of the following is a recurring item?

A)Equity in earnings of nonconsolidated subsidiaries
B)Error of a prior period
C)Discontinued operations
D)Extraordinary gain
E)Cumulative effect of change in accounting principle

Question 5

The following relate to Data Original in 2012.What is the ending inventory?
$\begin{array}{llcc} \text { Purchases } &\$540,000 \\ \text { Beginning Inventory } &80,000\\ \text { Purchase Returns } &10,000\\ \text { Sales} &800,000\\ \text { Cost of Goods Sold } &490,000\\\end{array}$

A)$120,000
B)$140,000
C)$210,000
D)$260,000
E)none of the answers are correct

Question 6

The stockholders' equity of Anamanda Company at September 30,2012,is presented below:
$\text {Common Stack, par value \$10, authorized 500,000 shares; 200,000}$

$\begin{array}{llcc} \text { shares issued and outstanding } &\$2,000,000 \\ \text { Paid-In Capital in Excess of Par } &300,000\\ \text { Retained Earnings } &\underline{1,300,000}\\ \text { } &\underline{\$3,600,000}\\ \text { } &\\ \text { } &\\\end{array}$

On October 1,2012,the Board of Directors of Anamanda declared a 10% stock dividend to be distributed on November 10.The market price of the common stock was $15 on October 1 and $17 on November 10.What is the amount of the charge to retained earnings as a result of the declaration and distribution of this stock dividend?

A)$0
B)$200,000
C)$300,000
D)$340,000
E)$750,000

Question 7

Which of the following is not a category within accumulated other comprehensive income?

A)Post retirement commitments on health plans
B)Foreign currency translation adjustments
C)Unrealized holding gains and losses on available-for-sale marketable securities
D)Changes to stockholders equity resulting from additional minimum pension liability adjustments
E)Unrealized gains and losses from derivative instruments

Question 8

Which of the following will be disclosed in the reconciliation of retained earnings?

A)Adjustment for an error of a prior period
B)Net income
C)Net loss
D)Dividends
E)All of the answers are correct.

Question 9

Fisher Company has 1,000,000 share of common stock with a par value of $10.Additional paid-in capital totals $10,000,000 and retained earnings is $12,000,000.The directors declare a 6% stock dividend when the market value is $5.The reduction of retained earnings as a result of the declaration will be:

A)$0.
B)$300,000.
C)$600,000.
D)$500,000.
E)None of the answers are correct.

Question 10

If a firm consolidates subsidiaries that are not wholly owned,an income statement item is created that is termed:

A)dividend income.
B)minority share of earnings.
C)equity income.
D)extraordinary.
E)gain from sale of subsidiary.

Question 11

If the disposal of a segment meets the criteria of a disposal of a segment,then:

A)the loss on disposal is an extraordinary item.
B)the loss on disposal is categorized as "other expense".
C)the results of operations of the segment will be reported in conjunction with the gain or loss on disposal.
D)the disposal qualifies as a change in entity,and prior years' statements presented on comparative purposes must be restated.
E)the effects of the disposal are shown as part of operations.

Question 12

Which of the following would be classified as an extraordinary item on the income statement?

A)Loss on disposal of a segment of business
B)Cumulative effect of a change in accounting principle
C)A sale of land
D)An error correction that relates to a prior year
E)A loss from a flood in a location that would not be expected to flood

Question 13

If Investor Company owns 20% of the stock of Investee Company and Investee Company reports profits of $100,000,then Investor Company reports equity income of:

A)$80,000.
B)$20,000.
C)$40,000.
D)$60,000.
E)None of the answers are correct.

Question 14

Which of the following would be included in operating income?

A)Interest income for a manufacturing firm
B)Rent income for a leasing subsidiary
C)Gain from sale of marketable securities for a retailer
D)Dividend income for a service firm
E)None of the answers are correct.

Question 15

Changes in account balances of Multi-Plus Inc.during 2012 were:
$\begin{array}{lc}&\underline{\text { Increase }}\\\text { Assets } & \$ 420,000 \\\text { Liabilities } & 125,000 \\\text { Capital Stock } & 100,000 \\\text { Additional Paid-In Capital } & 140,000 \\\text { Retained Earnings } & ?\end{array}$
Assuming that there were no charges to retained earnings other than dividends of $62,000,the net income for 2010 was:

A)($7,000)
B)$55,000
C)$117,000
D)$257,000
E)none of the answers are correct

Question 16

Which of the following would be classified as an extraordinary item on the income statement?

A)Loss from a strike
B)Correction of an error related to a prior period
C)Write-off of obsolete inventory
D)Loss on disposal of a segment of business
E)Loss from prohibition of a product

Question 17

Which of the following items on the income statement is not disclosed net of tax?

A)Unusual or infrequent item disclosed separately
B)Discontinued operations
C)Extraordinary loss
D)Cumulative effect of change in accounting principle
E)Unusual or infrequent item disclosed separately and discontinued operations are both not disclosed net of tax

Question 18

When a company discontinues and disposes of a component segment of its operations,the gain or loss from disposal should be reported as:

A)an adjustment to retained earnings.
B)a sale of fixed assets in "other" expense.
C)an extraordinary item.
D)an accounting change.
E)a special item after continuing operations and before extraordinary items.

Question 19

Which of the following is not true about a stock dividend?

A)With a stock dividend,the firm issues a percentage of outstanding stock as new shares to existing shareholders.
B)The overall effect of a stock dividend is to leave total stockholders' equity and each owner's share of stockholders' equity unchanged.
C)In theory,with a stock dividend,total market value considering all outstanding shares should not change.
D)Since the number of shares changes under a stock dividend,any ratio based on the number of shares must be restated.
E)The accounting for a stock dividend,assuming the distribution is relatively small,requires that the par value of the stock be removed from retained earnings.

Question 20

Anchor Company has 1,000,000 shares of common stock with a par value of $5.Additional paid-in capital totals $5,000,000 and retained earnings is $8,000,000.The directors declare a 10% stock dividend when the market value is $15.The reduction of retained earnings as a result of the declaration will be:

A)$0.
B)$500,000.
C)$800,000.
D)$1,000,000.
E)$1,500,000.

Question 21

An income statement is a summary of revenues and expenses and gains and losses,ending with net income for a particular period of time.

Question 22

A stock split merely increases the number of shares of stock;it usually does not change retained earnings or paid-in capital.

Question 23

It is the date of the declaration of dividends,not the date of dividend payment,that affects retained earnings and creates the liability.

Question 24

In analysis of income,for purposes of determining a trend,extraordinary items should be included.

Question 25

Equity earnings (losses)are the proportionate share of the earnings (losses)of the investee.

Question 26

In practice,the income statement is frequently considered to be the least important financial statement.

Question 27

Advertising expense would be an administrative expense.

Question 28

Ideally,income from continuing operations would be the better income figure to use to project the future from the analysis of historical statements.

Question 29

Other income and other expense are categories under which secondary activities of the firm not directly related to the operations are classified.

Question 30

Presenting an item after tax,with the related tax deducted,is called net-of-tax presentation.

Question 31

Comprehensive income is net income plus the periods change in accumulated other comprehensive income.

Question 32

Gross profit will be a prominent figure on a single-step income statement.

Question 33

The legality of distributions to stockholders is governed by federal law.

Question 34

The term primary analysis is used to describe consistent and conservative analysis.

Question 35

Earnings per share is the earnings per share of outstanding common stock.

Question 36

Accountants have not accepted the role of disclosing the firm's capacity to make distributions to stockholders.

Question 37

Equity earnings can distort the reported results of a business's operations.

Question 38

Retained earnings,an account on the balance sheet,represents the undistributed earnings of the corporation.

Question 39

With a stock dividend,total market value considering all outstanding shares should decline.

Question 40

Extraordinary items are always presented gross of applicable income taxes.

Question 41

Information for Scandinavian Products at the end of Year 4 follows. $\begin{array}{lr}\text { Current Assets } & \$ 900,000 \\\text { Current Liabilities } & 400,000 \\\text { Fixed Assets, Net } & 600,000 \\\text { Investments } & 100,000 \\\text { Long-Term Debt } & 500,000 \\\text { Dividends Declared on Common Stock during the Year } & 50,000 \\\text { Rncome Summary (income) } & 225,000 \\\text { Retained Earnings, January 1, Year 4 } & ? \\\text { CommonStock } & 150,000\\\text { Premium an Common Stack }&250,000\end{array}$

Required:
a.Find the ending balance in Retained Earnings as of December 31,Year 4.
b.Find the beginning balance in Retained Earnings as of January 1,Year 4.

Question 42

IFRS allows for alternative performance measures to be presented in the income statement that are not allowed by U.S.GAAP.

Question 43

Forta Company presents you with the following account balances taken from the December 31,2012,trial balance.Required:
Prepare a single-step income statement in proper form.
Additional data:

Question 44

Patricia Company owns 25% of Sandra Company and accounts for the investment on the equity basis and does not consolidate.At the beginning of 2012,the investment in Sandra Company was $180,000.In 2012,Sandra Company earned $70,000 and paid dividends of $10,000.Required:
a.How much will Patricia Company report as equity in earnings of Sandra Company in 2012?
b.How much cash flow will Patricia Company receive from Sandra Company in 2012?
c.Why does recognition of equity earnings cause problems in analysis?

Question 45

For the income statement under IFRS,there is a required format.

Question 46

Assume that Algary,Inc.uses the following financial statements for the year ended December 31,2012.
Categories on these statements follow:

Required:
Indicate by the statement abbreviation and category number how each of the following is best classified or where it is included in the computation.If an item is not reported anywhere,use the letter "X" to indicate this.Only the best answer should be selected.For balance sheet accounts only,if the account balance is normally opposite that of a typical account (contra),set off the answer in parentheses.Samples:

Question 47

The accounting standard provides considerable flexibility in reporting comprehensive income.

Question 48

Oregm Imports engages in the retail sale of household products and clothing.During 2012,the company disposed of the clothing segment.Oregm Imports had 150,000 shares of stock outstanding all year.The results of operations for 2012 follow.
Income taxes of 40% apply to all items.Required:
Prepare a multiple-step income statement for the year ended December 31,2012,in good format.

Question 49

Information related to Batavia Furniture Company for the year ended December 31,2012,follows.
Required:
Prepare in good form a multiple-step income statement for the year 2012.Assume a 50% tax rate and that 5,000 shares of common stock were outstanding during the year.

Question 50

The income statement for Lifeline Products in single-step format follows.
Required:
a.Convert the statement to multiple-step format.
b.Recompute net income with the unusual loss removed.
c.Why may net income with the unusual loss removed be preferable to use for trend analysis?
d.Speculate on why this loss is not considered extraordinary or as a disposal of a segment.

Question 51

Under IFRS,equipment may be revalved.

Question 52

Noncontrolling interest relects income from ownership of noncontrolling shareholders in the equity of consolidated subsidaries less than wholly owned.

Question 53

Canco Inc.owns 70% of Supersonics and consolidates this subsidiary.In 2012,Supersonics earned $100,000 after tax and Canco earned $1,000,000.Without consideration of minority interests,the stockholders' equity of Supersonics at the end of 2012 was $1,200,000.Required:
a.Determine the minority share of earnings in 2012.
b.Determine the consolidated net income.
c.Determine the minority interest at the end of 2012 on the balance sheet.
d.How should minority interest be classified on the balance sheet for analysis?

Question 54

Since the number of shares changes under both a stock dividend and a stock split,any ratio based on the number of shares must be restated.

Question 55

The income statement of Jones Company for the year ended December 31,2012,shows:

Required:
a.Compute the net earnings after removing nonrecurring items.
b.Determine the earnings from the nonconsolidated subsidiary.
c.Determine the total tax amount.