Deck 6: Income Statement and Statement of Changes in Equity

Question 1

A machine is purchased for $100 000.It is to be depreciated on a reducing balance basis using a rate of 20%.How much will be charged for depreciation expense for year 2 of the machine's life?

A)$16 000
B)$20 000
C)$15 000
D)$12 800

Answer 1

A

Question 2

Most listed companies are required to report financial results to the Australian Securities Exchange:

A)annually.
B)half-yearly.
C)quarterly.
D)monthly.

Answer 2

B

Question 3

Which of these will be recorded as income?

A)A loan is received from a bank
B)Money is collected from a customer owing from goods sold last week
C)A sale is made on credit
D)Additional capital is contributed by the owner

Answer 3

C

Question 4

If an expense is paid for in cash,then

A)liabilities will decrease.
B)assets will decrease.
C)assets will increase.
D)equity will increase.

Question 5

A machine is purchased for $130 000.It is estimated that it has a useful life of 8 years and will then be sold for $10 000.Using the straight-line method calculate the amount of depreciation to be charged for each year of useful life.

A)$1625
B)$10 000
C)$16 250
D)$15 000

Question 6

Which of these items,under the current accounting standards,is not included in the measurement of profit in the income statement?

A)Dividends received
B)Gain on the disposal of non-current assets
C)Gain on asset revaluation
D)Cost of sales

Question 7

If a car is serviced on 31 May and an invoice is issued,the owner picks up the car on 31 May,the owner sends a cheque to the servicing firm on 4 June,and the firm banks the cheque on 7 June,income is recognised by the servicing firm on

A)31 May
B)4 June
C)7 June
D)5 June

Question 8

An entity's financial year ends on 30 June 2013.On 1 March 2013 it pays a 12 months insurance premium of $12 000.Under the accrual system of accounting how much of the premium will be recognised as an expense for the year ended 30 June 2013 and how much will be treated as an asset prepaid insurance?

A)$9000 expense and $3000 prepaid insurance
B)$4000 expense and $8000 prepaid insurance
C)$8000 expense and $4000 prepaid insurance
D)$3000 expense and $9000 prepaid insurance

Question 9

If income earned is not accrued at the end of the accounting period,the result will be an

A)Understatement in liabilities and an overstatement in profit
B)Overstatement in liabilities and an understatement in profit
C)Overstatement in assets and profit
D)Understatement in assets and profit

Question 10

A machine is purchased for $130 000.It is estimated that it has a useful life of 8 years and will then be sold for $10 000.Using the straight-line method the balance in the accumulated depreciation account at the end of the third year of the machine's useful life is:

A)$120 000
B)$45 000
C)$48 750
D)$15 000

Question 11

If a legitimate expense is not accrued at the end of the accounting period,the result will be an

A)understatement in liabilities and an overstatement in profit.
B)overstatement in liabilities and an understatement in profit.
C)overstatement in assets and profit.
D)understatement in assets and profit.

Question 12

Which of these is not an example of an accounting estimate?

A)Useful life of a depreciable asset
B)Impairment of asset
C)Long service leave provided
D)Accounts payable

Question 13

Which of the following must exist before income can be recognised?

A)the increase in future economic benefits related to an increase in an asset or a decrease in a liability must have arisen.
B)the increase in future economic benefits must be able to be measured reliably
C)all option must exist
D)income recognition must occur at the same time as the recognition of increases in assets or reductions in liabilities.

Question 14

Office supplies purchased in bulk are initially charged to an asset account and are used on a daily basis.An expense will normally be recorded when:

A)supplies are ordered.
B)supplies are paid for.
C)at the end of the accounting period when a balance day adjustment is prepared for supplies used.
D)on a daily basis.

Question 15

It is true that

A)profit is the excess in cash inflows from income over the cash outflows from expenses.
B)income is recognised when the economic benefits are certain and can be reliably measured.
C)whether a transaction is made with cash or credit has no effect on the profit of an entity.
D)income is only recognised when cash is received

Question 16

A transaction recording income earned

A)leaves total assets unchanged.
B)increases assets and decreases equity.
C)increases assets and equity.
D)increase assets and liabilities.

Question 17

An accounting period that is one year in length is called:

A)the time period assumption.
B)a financial year.
C)an interim period.
D)an economic year

Question 18

Equity is increased by

A)liabilities.
B)expenses.
C)income.
D)dividends.

Question 19

A machine is purchased for $120 000.It is estimated that it has a useful life of 4 years and will then be sold for $8000.Using the straight-line method the carrying value of the machine at the end of the third year of the machine's useful life is:

A)$28 000
B)$42 000
C)$36 000
D)$60 000

Question 20

The income statement

A)presents the income and expenses of an entity for a specific period of time.
B)reports the changes in assets,liabilities and equity over a period of time.
C)reports the assets,liabilities and equity at a specific point in time.
D)summarises the change in retained earnings over a specific period of time.

Question 21

Under the accounting standard governing the presentation of the income statement the item is not required to be presented on the face of the statement is

A)Revenue
B)Depreciation
C)Finance costs
D)Tax expense

Question 22

If sales = $45 000,purchases = $25 000,beginning inventory = $10 000 and ending inventory = $8000 cost of sales is:

A)$18 000
B)$27 000
C)$7000
D)$20 000

Question 23

Which of the following statements relating to the presentation of the income statement by non-reporting entities is not true?

A)there is no prescribed format
B)the purpose of the income statement is to report the profit or
Loss for the entity for the reporting period.
C)income is usually more detailed and less aggregated than that prepared for a reporting entity
D)the income statement must be a GPFR prepared according to the AASB accounting standards

Question 24

Separately disclosing an income or expense item as an extraordinary item in the income statement

A)is a very common practice.
B)is popular with executives
C)is no longer permissible.
D)is popular with shareholders

Question 25

Which of these is the best measure of an entity's profitability?

A)Profit before tax
B)Profit after tax
C)Earnings before interest and tax
D)There is no one 'best' profit measure;it depends on the requirements of the user

Question 26

If sales = $45 000,purchases = $25 000,beginning inventory = $10 000 and ending inventory = $8000 cost of sales is:

A)$18 000
B)$27 000
C)$7000
D)$20 000

Question 27

Under the accounting standards which of these is not included in finance costs?

A)interest costs
B)lease finance charges
C)amortisation of discounts related to borrowing
D)depreciation expense

Question 28

Expenses classified by nature would not include:

A)manufacturing expenses
B)employee benefits expenses
C)depreciation expense
D)wages and salaries expense

Question 29

If profit after tax and interest is $200 000,interest expense is $25 000 and taxation is $62 000,profit before interest and tax is:

A)$67 000
B)$292 000
C)$113 000
D)$287 000

Question 30

Which of these is not an income type item?

A)sales revenue
B)interest revenue
C)dividends received
D)unearned revenue

Question 31

For a retailing or manufacturing entity,profit is equal to gross profit less

A)taxation expense.
B)cost of sales.
C)all expenses.
D)all expenses other than cost of sales.

Question 32

With respect to reporting expenses,reporting entities are:

A)required to list all their expenses without aggregation
B)required to classify expenses by nature or function
C)required to classify expenses function only
D)not required to classify expenses in any particular way

Question 33

Which of the following is not an administrative expense?

A)motor vehicle lease payments
B)salaries and wages
C)rent
D)utilities charges and supplies

Question 34

To isolate the returns associated with investing decisions only,the measure of profit used is:

A)earnings before interest and taxation (EBIT)
B)earnings before interest,taxation,depreciation and amortisation (EBITDA)
C)gross profit
D)profit after taxation

Question 35

The statement concerning a company's income tax expense that is correct is:

A)Income tax expense often differs from the amount of tax paid to the ATO (Australian Taxation Office)
B)Income tax expense will be the same as the amount of tax paid to the ATO
C)Income tax expense will only rarely differ from the amount of tax paid to the ATO
D)Income tax expense is calculated as pre-tax accounting profit multiplied by the company tax rate

Question 36

A test for distinguishing between an asset and an expense is

A)whether the item will be turned into cash by the end of the accounting period.
B)whether the benefit extends into the next accounting period.
C)whether the payment is made in cash.
D)the amount of the transaction.

Question 37

The cost of sales is calculated as follows:

A)ending inventory + purchases - beginning inventory
B)purchases - ending inventory - beginning inventory
C)beginning inventory + purchases - ending inventory
D)beginning inventory - purchases + ending inventory

Question 38

Which of the following expenses must be disclosed by a reporting entity?

A)depreciation and amortisation expense
B)finance costs
C)auditors' fees
D)all of the options are expenses that must be disclosed by a reporting entity

Question 39

The determination of whether an item is material is based on which of the following?

A)the size of the item
B)the nature of the item
C)whether its non-disclosure could influence users' decision making
D)all of the options are used to determine whether an item is material

Question 40

The correct statement is:

A)The income statement prepared for internal use is similar to one prepared for external use
B)The income statement prepared for internal use is more summarised than one prepared for external use
C)The accounting standards govern the presentation of income statements prepared for both internal and external use
D)While the two income statements have common elements the statement prepared for external use is more aggregated than the one prepared for internal users

Question 41

The definition and recognition criteria for income and expenses are specified in the _________________ _________________ For a transaction to be recognised in the income statement the elements must satisfy both the definition and recognition criteria of an income or expense.

Question 42

The statement of comprehensive income reports the profit or loss and other
Comprehensive income.Which of the following is an example of other comprehensive income?

A)dividends
B)royalties
C)non-current asset revaluations taken directly to a revaluation surplus
D)sales

Question 43

If equity at the beginning of the accounting period was $120 000 and at the end of the period was $175 000,and drawings by the owner during the period were $30 000,how much profit was earned during the period?

A)$85 000
B)$55 000
C)$25 000
D)$30 000

Question 44

The accounting standard that prescribes disclosure of specific income and expense items requires the disclosure to be on the face of the income statement or in the _________ attached to the report.

Question 45

Income accrued is income recognised _________ the cash has been received.

Question 46

___________________ management

Question 47

Which of the following statements about gross profit is not true?

A)Gross profit is equal to sales less cost of sales
B)An entity cannot be sustainable unless the gross profit is positive
C)Gross profit is applicable to manufacturing and retail businesses
D)Gross profit is equal to total income minus total expenses

Question 48

Which of the following could be found in a statement of changes in equity?

A)The statement shows all changes in equity arising from equity contributions and dividends paid
B)The statement shows all changes in equity arising from shares purchased
C)The statement shows all changes in equity arising separately from non-owner changes in equity (e.g.profit).
D)All options could be found in a statement of changes in equity

Question 49

If an item meets the definition of an expense,to be reported in the income statement,it must also meet the recognition criteria of being probable that the decrease in economic benefits has arisen and that the amount is able to be reliably _______________.

Question 50

The order in which the income statement and balance sheet are normally completed is:

A)irrelevant.
B)income statement first.
C)balance sheet first.
D)both done simultaneously.

Question 51

Post-tax profit is more important to a shareholder than pre-tax profit as:

A)the amount of tax paid does not give a true indication of the underlying health of the entity.
B)tax has to be paid before profits can be distributed as dividends.
C)personal tax deductions can negate any tax paid by the entity prior to dividends being distributed.
D)as the entity has no control over the amount of tax that needs to be paid;tax payments do not affect the value of their shares.

Question 52

Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity,other than those relating to contributions from equity participants,is the Framework's definition of ____________________.

Question 53

If sales revenue is $300 000 and cost of sales is $250 000,the gross profit margin is:

A)12%
B)17%
C)20%
D)83%

Question 54

Which of the following is not disclosed in the statement of comprehensive income?

A)income and expenses recognised in the income statement
B)income and expenses recognised directly in equity
C)transactions with owners as owners
D)all options are disclosed in the statement of comprehensive income

Question 55

If owners' equity at the beginning of the accounting period was $60 000 and at the end of the period was $75 000,and drawings by the owner during the period were $20 000,how much profit was earned during the period?

A)$15 000
B)$35 000
C)$25 000
D)$5000

Question 56

______________ _____________ _____________ _____________ (GAAP)are acceptable accounting practices which have become documented in the accounting standards.

Question 57

When the value of an asset is lower than its carrying amount,the asset is considered to be impaired and must be written down to its ______________ amount with the write-down being recognised as an impairment expense in the reporting period in which it occurs.

Question 58

An item is considered to be __________________ based on the size and/or nature of the item,and whether its non-disclosure could influence users' decision making.

Question 59

If sales = $45 000,purchases = $25 000,beginning inventory = $10 000 and ending inventory = $8000 gross profit is:

A)$18 000
B)$27 000
C)$7000
D)$20 000

Question 60

The ___________ statement is prepared to calculate an entity's profit.

Question 61

The balance of retained earnings at the end of the period is included in the equity section of the __________ sheet.

Question 62

As the accountant of Curtains Pty Ltd,you are preparing the financial statements for the month of August 2013.The assistant accountant gives you the following information regarding some transactions that he thinks may have an impact on the financial statements:
A.On 1^st August 2013,Curtains paid $2000 for a 2-month building insurance policy covering the months of August and September
B.The next payment date for employee wages and salaries is 3^rd September 2013.
C.Curtains Pty Ltd earned $300 interest income for the month of August that has not been received in cash.
D.The company depreciates its $25 000 equipment over 5 years using the straight-line method.
E.One of the clients paid an $8000 deposit to Curtains on 15 August for some works that will commence in September.The rest of the invoice amounting to $12 000 is paid on 28 September.
F.At the beginning of August,Curtains Pty Ltd paid $6000 for 6 months rent in advance.
Required
a.As Curtains is using accrual accounting system,determine if the transactions above are accrued income,income received in advance,accrued expense,or prepaid expense.
b.You are trying to explain the difference between cash and accrual accounting to the assistant accountant.Compare how transaction no.1 and 5 above are recorded under cash and accrual accounting during August and September 2013,and show how profits are calculated under both accounting systems.

Question 63

Retained earnings,retained profits or accumulated profits are interchangeable terms used to describe ___________________ profits in the entity.

Question 64

The accounting standards require all reporting entities to prepare a statement of changes in ______________.

Question 65

__________________ earnings

Question 66

The statement of __________ in equity is an additional statement to the income statement and the balance sheet that is required to be prepared under the accounting standards.