Deck 5: Statements of Net Income and Comprehensive Net Income

Question 1

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 1

D

Question 2

Most elements of operating income are permanent in nature.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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 5

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 6

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

Question 7

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

Question 8

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 9

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 10

Elements of other comprehensive income are primarily permanent in nature.

Question 11

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

Question 12

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 13

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 14

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

Question 15

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

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

Question 16

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

Question 17

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

Question 18

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 19

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

Question 20

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 21

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 22

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

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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 28

Compare and contrast two earnings management techniques.

Question 29

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 30

Identify the six key performance measure subtotals on the statement of net income.

Question 31

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

Question 32

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 33

What is the most common approach to earnings management?

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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 38

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

Question 39

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

Question 40

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

Question 41

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 42

Sales minus cost of goods sold equals gross profit.

Question 43

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

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

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 46

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 47

The income tax provision includes all income taxes from every source and every cause.

Question 48

Which 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 49

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

Question 50

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 51

Why do companies issue condensed income statements?

Question 52

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 53

Which 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 54

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

A)income from discontinued operations
B)gross profit
C)operating income
D)income before tax

Question 55

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.

Question 56

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.

Question 57

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 58

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 misrepresents net income due to oversimplification.

Question 59

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

Question 60

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

Question 61

Gains and losses from discontinued operations are shown on the income statement after the provision for income taxes is presented.

Question 62

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 63

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 64

A discontinued operation must be a business segment or unit that generates,or once generated,revenues.

Question 65

What is the amount of operating income for Tuche Millinery?

A)$602
B)$587
C)$247
D)$232

Question 66

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 67

What items are included in a company's operating income?

Question 68

What items are included in a company's income from continuing operations and how are these items categorized if the company uses (a)a multi-step format or (b)a single-step format?

Question 69

Which of the following is not a characteristic that must be considered when determining that a business activity is a component of an entity for purposes of classifying that activity as a discontinued operation?

A)The activity comprises operations and cash flows.
B)The activity constitutes a strategic advantage.
C)The activity can be clearly distinguished for financial reporting purposes.
D)The activity is a portion of the entity.

Question 70

What is the amount of operating income for Cambridge Company?

A)$2,809
B)$3,195
C)$5,108
D)$5,494

Question 71

What is the amount of gross profit for Tuche Millinery?

A)$981
B)$673
C)$632
D)$587

Question 72

When a significant operation that does not meet the definition of a discontinued operation is disposed of,U.S.GAAP requires disclosure of the pre-tax profit (loss)of that operation.

Question 73

What is the amount of income from continuing operations for Cambridge Company?

A)$1,575
B)$1,961
C)$2,809
D)$3,195

Question 74

Gains and losses from discontinued operations are shown on the income statement after the provision for income taxes is presented.

Question 75

Evaluating whether the disposal of a component of an entity constitutes a discontinued operation begins with ________.

A)remeasuring the value of net assets held for disposal
B)identifying the cash flows that can be clearly distinguished operationally
C)segregating its operating revenues and expenses from those of continuing operations
D)assessing whether a strategic shift has occurred

Question 76

What is the amount of income from continuing operations for Tuche Millinery?

A)$247
B)$302
C)$194
D)$145

Question 77

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 78

What is the amount of gross profit for Cambridge Company?

A)$9,369
B)$5,731
C)$5,494
D)$5,108

Question 79

Paxdot Labs provided the following partial-trial balance for the current year.Beginning with the line item Operating Income,prepare a statement of comprehensive income for the year ended December 31.Paxdot is subject to a 40% income tax rate.

Question 80

Baggow Styles provided the following partial-trial balance for the current year.Beginning with the line item Income from Continuing Operations Before Taxes,prepare a statement of net income for the year ended December 31.Baggow is subject to a 40% income tax rate.
Accumulated Depreciation on Assets from