Deck 11: Evaluating Performance: Earnings Quality, the Income Statement, the Statement of Comprehensive Income

Question 1

A sign(s)of increasing earnings quality is(are):

A)improving gross margin to sales ratio.
B)declining operating expenses to sales ratio.
C)improving operating income to sales ratio.
D)all of the above.

Answer 1

D

Question 2

The operating expense section of an income statement would NOT include:

A)salaries expense.
B)utilities expense.
C)supplies expense.
D)interest expense.

Answer 2

D

Question 3

For a retailer,there will be positive income from operations if:

A)revenues are greater than cost of goods sold.
B)revenues are greater than operating expenses.
C)gross profit is greater than operating expenses.
D)cost of goods sold is greater than operating expenses.

Answer 3

C

Question 4

Components of increasing earnings quality include all of the following EXCEPT:

A)declining or stable operating expenses compared to sales.
B)improving gross margin compared to sales.
C)increasing cost of goods sold to sales ratio.
D)proper revenue and expense recognition.

Question 5

The revenue recognition principle requires that sales revenues be recognized when it is earned.

Question 6

Recognizing revenue before it is earned is a major source of financial statement fraud.

Question 7

Roughly half of all financial statement frauds over the past two decades have involved:

A)improper expense recognition.
B)improper revenue recognition.
C)improper asset recognition.
D)improper liability recognition.

Question 8

The purpose of channel stuffing is to increase revenues.

Question 9

Sales revenue less cost of goods sold is called:

A)gross profit.
B)net income.
C)net profit.
D)net sales.

Question 10

If net sales are $1,200,000 and cost of goods sold is $300,000,gross profit is $900,000.

Question 11

Financial statement fraud does not include the improper recognition of expenses.

Question 12

Gross profit percentage is calculated by dividing cost of goods sold by net sales.

Question 13

A company with low earnings quality is more likely to report ________ than a company with high earnings quality.

A)high earnings in the future
B)low earnings in the future
C)high revenue levels in the future
D)decreasing operating expenses to sales in the future

Question 14

Financial statement fraud involving expense recognition involves:

A)understating the amount of expenses.
B)failure to record and disclose some expenses.
C)delaying the proper recognition of expenses.
D)all of the above.

Question 15

A corporation's net income receives more attention than any other financial statement item.Why?

A)An upward trend in net income usually leads to dividends in the future.
B)An upward trend in net income usually leads to higher stock prices in the future.
C)An upward trend in net income usually leads to an unqualified audit opinion.
D)A and B

Question 16

Examples of fraud involving improper revenue recognition include:

A)recording revenue before performing the services required.
B)channel stuffing.
C)sales to nonexistent customers.
D)all of the above

Question 17

A sign of decreasing earnings quality is:

A)declining Cost of Goods Sold to sales ratio.
B)declining Gross Margin to sales ratio.
C)declining operating expenses to sales ratio.
D)increasing operating income to sales ratio.

Question 18

Steadily decreasing cost of goods sold as a percentage of net sales is a sign of:

A)increasing earnings quality.
B)decreasing earnings quality.
C)financial statement fraud involving expense recognition.
D)financial statement fraud involving revenue recognition.

Question 19

A type of financial statement fraud that is accomplished by shipping more to customers than they ordered,with the expectation that they may return some or all of the items is called:

A)improper asset recognition.
B)improper expense recognition.
C)channel stuffing.
D)cooking the books.

Question 20

Ongoing expenses incurred by the entity,other than the direct expenses for merchandise,are called:

A)other expenses.
B)extraordinary items.
C)cost of goods sold.
D)operating expenses.

Question 21

In a foreign-currency transaction,foreign currencies must be converted to U.S.dollars for financial reporting purposes.

Question 22

Foreign-Currency Transaction Losses can be avoided if international transactions are settled in U.S.dollars instead of the foreign currency.

Question 23

On June 15,Copps Stores sold twenty-five computers,on account,to a company located in Argentina for 3,000,000 pesos.On that date the peso is worth $0.079.On July 15,when the peso was worth $0.070,payment was received.The journal entry on July 15 by Copps Stores would include a:

A)credit to Cash $237,000.
B)credit to Accounts Receivable $210,000.
C)debit to Foreign-Currency Transaction Loss $27,000.
D)credit to Sales $210,000.

Question 24

Hedging foreign currency transactions can be accomplished by:

A)equal amounts of receivables and payables in foreign currencies.
B)the purchase of future contracts.
C)the purchase of foreign currencies to be received in the future.
D)all of the above.

Question 25

Taxable income should always match pretax accounting income.

Question 26

Income tax payable is the amount of tax to be paid to the government based on the income tax return.

Question 27

When a U.S.-based company has a payable denominated in a foreign currency,the U.S.company wants the foreign currency to ________ and the U.S.dollar to _________.

A)strengthen; strengthen
B)strengthen; weaken
C)weaken; strengthen
D)weaken; weaken

Question 28

A U.S.-based company sells merchandise on account to a company in Mexico.The Mexican company wants to pay for the merchandise in pesos.If the peso decreases in value relative to the dollar,the seller will record a ________.We say the peso ________ relative to the dollar.

A)Foreign Currency Transaction Gain; weakens
B)Foreign Currency Transaction Gain; strengthens
C)Foreign Currency Transaction Loss; weakens
D)Foreign Currency Transaction Loss; strengthens

Question 29

On August 1,Steffen Computers,Inc.purchased thirty computer chips,on account,from a company located in Taiwan for 500,000 Taiwan dollars.On that date the Taiwan dollar is worth $0.040.On September 1,when the Taiwan dollar was worth $0.038,payment was made.The journal entry on September 1 by Steffen Computers,Inc.would include a:

A)debit to Accounts Payable $19,000.
B)debit to Foreign-Currency Transaction Loss $1,000.
C)credit to Foreign-Currency Transaction Gain $1,000.
D)credit to Cash $20,000.

Question 30

A U.S.-based company purchases merchandise on account from a company in Mexico.The purchase contract is denominated in pesos.If the peso decreases in value relative to the dollar,the purchaser will record a ________.We say the peso ________ relative to the dollar.

A)Foreign Currency Transaction Loss; weakens
B)Foreign Currency Transaction Loss; strengthens
C)Foreign Currency Transaction Gain; weakens
D)Foreign Currency Transaction Gain; strengthens

Question 31

The Foreign-Currency Transaction Gain account holds gains and losses on transactions settled in a foreign currency.

Question 32

A company has a Foreign-Currency Transaction Gain of $1,000 and a Foreign-Currency Transaction Loss of $10,000.How is this information reported on the income statement?

A)Other Losses: Foreign-Currency Transaction Loss $10,000 and Other Gains: Foreign-Currency Transaction Gain $1,000
B)Other Losses: Foreign-Currency Transaction Loss,net $9,000
C)Other Comprehensive Loss: Foreign-Currency Transaction Loss $10,000 and Other Comprehensive Income: Foreign-Currency Transaction Gain $1,000
D)Other Comprehensive Loss: Foreign-Currency Transaction Loss,net $9,000

Question 33

On August 1,Deluka Computers,Inc.purchased thirty computer chips,on account,from a company located in Taiwan for 500,000 Taiwan dollars.On that date the Taiwan dollar is worth $0.040.On September 1,when the Taiwan dollar was worth $0.038,payment was made.Deluka Computers uses the perpetual inventory system.The journal entry on August 1 by Deluka Computers,Inc.would be:

A)debit Inventory $19,000 and credit Accounts Payable $19,000.
B)debit Inventory $20,000 and credit Accounts Payable $20,000.
C)debit Inventory $20,000,credit Foreign-Currency Transaction Gain $1,000,and credit Accounts Payable $19,000.
D)debit Inventory $20,000 and credit Cash $20,000.

Question 34

Income tax expense is used to calculate income from operations.

Question 35

When a U.S.-based company holds a receivable denominated in a foreign currency,the U.S.company wants the foreign currency to _________ against the U.S.dollar so that the foreign currency can be converted into ________.

A)weaken; fewer dollars
B)weaken; more dollars
C)strengthen; fewer dollars
D)strengthen; more dollars

Question 36

Hedging enables an entity to protect itself from losing money in a foreign transaction by engaging in a counterbalancing transaction.

Question 37

Income tax payable is computed by multiplying income before income taxes per the income statement by the income tax rate.

Question 38

The net of foreign-currency transaction gains and losses will appear on the income statement.

Question 39

On June 15,Blonski Computer Company sold twenty-five computers on account to a company located in Argentina for 3,000,000 pesos.On that date,the peso is worth $0.079.On July 15,when the peso was worth $0.070,payment was received.Blonski Computer Company uses the perpetual inventory system.Ignoring Cost of Goods Sold,the journal entry on June 15 by Blonski Computer Company would be:

A)debit Accounts Receivable $237,000 and credit Sales Revenue $237,000.
B)debit Accounts Receivable $210,000 and credit Sales Revenue $210,000.
C)debit Accounts Receivable $210,000,debit to Foreign-Currency Transaction Loss $27,000 and credit Sales Revenue $237,000.
D)debit Accounts Receivable $237,000,credit Sales $210,000,and credit Foreign Currency Transaction Gain $27,000.

Question 40

A company has a Foreign-Currency Transaction Loss of $1,000 and a Foreign-Currency Transaction Gain of $10,000.How is this information reported on the income statement?

A)Other Losses: Foreign-Currency Transaction Loss $1,000 and Other Gains: Foreign-Currency Transaction Gain $10,000
B)Other Gains: Foreign-Currency Transaction Gain,net $9,000
C)Other Comprehensive Income: Foreign-Currency Transaction Gain $10,000 and Other Comprehensive Loss: Foreign-Currency Transaction Loss $1,000
D)Other Comprehensive Income: Foreign-Currency Transaction Gain,net $9,000

Question 41

The formula to determine income tax payable is:

A)taxable income (from the income tax return)multiplied by the income tax rate.
B)taxable income(from the income statement)multiplied by the income tax rate.
C)income before income tax expense (from the tax return)multiplied by the income tax rate.
D)income before income tax expense (from the income statement)multiplied by the income tax rate.

Question 42

Assume it is the first year of operations.When pretax accounting income exceeds taxable income,a:

A)Deferred Tax Asset is debited.
B)Deferred Tax Liability is credited.
C)Deferred Tax Asset is credited.
D)Deferred Tax Liability is debited.

Question 43

Common stock should be purchased if the estimated value of a company exceeds its current market value.

Question 44

Eastwich Corporation has pretax accounting income of $575,000 and taxable income of $560,000.The company's income tax rate is 30%.The journal entry to record the income tax includes a:

A)debit to Deferred Tax Asset $4,500.
B)credit Income Tax Payable $172,500.
C)credit to Deferred Tax Liability $4,500.
D)debit Income Tax Expense $168,000.

Question 45

The estimated value of a share of a company's stock is less than the current market price per share.The appropriate investment decision should be to:

A)buy the company's stock.
B)hold the company's stock.
C)sell the company's stock.
D)sell the company's stock on the margin.

Question 46

Operating income includes income from discontinued operations.

Question 47

An event or transaction should be reported as an extraordinary item if it is unusual in nature and if it occurs infrequently.

Question 48

Which of the following statements is TRUE?

A)The income tax return is prepared using GAAP.
B)The income tax return is prepared using rules set by the SEC.
C)The income tax return is prepared using rules set by the IRS.
D)The income tax return and the income statement are identical.

Question 49

The formula to determine income tax expense is:

A)taxable income (from the income tax return)multiplied by the income tax rate.
B)taxable income(from the income statement)multiplied by the income tax rate.
C)income before income tax expense (from the tax return)multiplied by the income tax rate.
D)income before income tax expense (from the income statement)multiplied by the income tax rate.

Question 50

The loss incurred as a result of the impairment of goodwill should be reported as:

A)part of discontinued operations.
B)an operating expense.
C)other expenses and losses.
D)an extraordinary item.

Question 51

Income tax expense appears on the:

A)tax return.
B)statement of stockholders' equity.
C)income statement.
D)balance sheet.

Question 52

Income tax payable appears on the:

A)statement of retained earnings.
B)statement of stockholders' equity.
C)income statement.
D)balance sheet.

Question 53

When a company discontinues a segment of its business,the income statement should report income (loss)from continuing operations and income (loss)from discontinued operations.

Question 54

The following earnings per share information is available for a stock you are interested in purchasing as an investment: The investment capitalization rate is 7.5%.How much should an investor pay for a share of stock?

A)$50.00
B)$58.00
C)$64.00
D)$70.00

Question 55

One reason why taxable income and pretax accounting income may not be equal is due to the difference in depreciation methods used.

Question 56

The gain or loss on the disposal of a business segment is shown on the income statement as:

A)an extraordinary item.
B)part of discontinued operations
C)part of income from operations.
D)other gains or losses.

Question 57

Katherine's Fashions is going to discontinue one of its manufacturing divisions.The division's assets with a book value of $1,000,000 are sold for $750,000.The division generated an operating loss of $145,000 after the decision was made to discontinue the segment.Ignoring income taxes,what total amount should be reported on the income statement as discontinued operations?

A)$105,000 loss
B)$250,000 loss
C)$395,000 loss
D)$145,000 gain

Question 58

Extraordinary gains and losses are shown "net of tax" on the income statement.

Question 59

Western Corporation has taxable income of $390,000 and pretax accounting income of $363,000.The company's income tax rate is 30%.The journal entry to record the income tax includes a:

A)debit to Income Tax Expense $117,000.
B)credit to Deferred Tax Asset $8,100.
C)debit to Deferred Tax Asset $8,100.
D)credit to Income Tax Payable $108,900.

Question 60

The loss from the disposal of a segment of a business is called:

A)an extraordinary loss.
B)other expense.
C)other loss.
D)loss on sale of discontinued operations.

Question 61

Following U.S.Generally Accepted Accounting Principles,how is a change in accounting estimate handled?

A)The new estimate must be used in the current and future years only.
B)The new estimate must be used in the prior year financial statements only.
C)The new estimate must be used in the future years only.
D)The new estimate must be used in the prior,current and future years.

Question 62

Which of the following is reported as Other Losses and Expenses on the income statement of a major retailer?

A)loss due to sale of a segment of a business
B)loss due to sale of a piece of equipment
C)loss due to takeover of a foreign segment by a foreign government
D)loss due to hurricane in Minnesota that destroyed a plant building

Question 63

If an item is unusual but not infrequent it is:

A)reported net of tax as Other Gains and Losses.
B)reported at its gross amount as Other Gains and Losses.
C)disclosed as a note to the financial statements.
D)reported as an extraordinary item.

Question 64

The loss from discontinued operations includes:

A)operating loss of discontinued segment during divestiture period.
B)loss on sale of discontinued segment.
C)unusual and infrequent losses.
D)A and B.

Question 65

Which of the following would be considered an extraordinary item?

A)Losses from a labor dispute
B)Losses from a natural disaster
C)Writing-down inventory to lower-of-cost or market
D)Losses from the sale of property

Question 66

Modern Detailing,Inc.has incurred a $50,000 loss on property due to an earthquake.Earthquakes are rare in this region.What amount will be reported for this loss on the company's income statement,assuming a 30% tax rate? How will the loss be classified on the income statement?

A)Other Losses,$50,000
B)Extraordinary Loss,$35,000
C)Extraordinary Loss,$15,000
D)Other Losses,$35,000

Question 67

An extraordinary item is:

A)both infrequent in occurrence and unusual in nature for the company.
B)unusual in nature for the company only.
C)infrequent in occurrence for the company only.
D)commonly reported by companies following U.S.Generally Accepted Accounting Principles.

Question 68

When predicting a company's future income,financial analysts exclude:

A)gains or losses from discontinued operations.
B)extraordinary gains or losses.
C)accounting changes in accounting principle.
D)all of the above.

Question 69

The following items are extraordinary items EXCEPT:

A)loss due to hurricane damage of plant in Wisconsin.
B)loss of vehicles due to damage from blizzard in Southern California.
C)loss due to expropriation of company assets by a foreign government.
D)loss on lawsuit.

Question 70

If a company reports both basic and diluted EPS,diluted EPS will always be equal or lower than basic EPS.

Question 71

For a retailer,how is Interest Expense classified on the income statement?

A)Operating Expenses
B)Extraordinary Expense
C)Income Tax Expense
D)Other Expenses and Losses

Question 72

Extraordinary items:

A)include the expropriation of a company's assets by a foreign government.
B)include the loss from the sale or exchange of equipment.
C)are treated the same under IFRS and GAAP.
D)include the gains and losses due to management restructuring.

Question 73

The estimated value of a company is $18 million.The company has 2 million shares outstanding at a market price of $10 per share.You already own 1,000 shares of the stock.Should you buy,sell or hold the stock?

A)You should buy more shares of the stock.
B)You should hold the stock for now.
C)You should sell the stock.
D)There is not enough information to make a decision.

Question 74

Under International Financial Reporting Standards,which line item or caption below is NOT used?

A)other losses and expenses
B)other gains and revenues
C)loss due to discontinued operations
D)extraordinary loss

Question 75

The current market price per share is $32.Earnings per share for income from continuing operations is $10.00 per share.Earnings per share for net income is $5.00 per share.The investment capitalization rate is 10%.What is the estimated value of the stock per share?

A)$10.00
B)$50.00
C)$100.00
D)$320.00

Question 76

Which of the following line items are reported net of tax on the income statement?

A)operating loss of discontinued operations
B)loss on sale of discontinued segment
C)extraordinary loss due to flood damage in factory in Phoenix,Arizona
D)all of the above

Question 77

What is the CORRECT order to list line items on the income statement?

A)Extraordinary items,Discontinued operations,Other revenues and expenses
B)Discontinued operations,Extraordinary items,Other revenues and expenses
C)Other revenues and expenses,Discontinued operations,Extraordinary items
D)Other revenues and expenses,Extraordinary items,Discontinued operations

Question 78

Prepare a multiple-step income statement for Sterner Corporation for the year ending December 31,2015.The tax rate for Sterner Corporation is 30%.The following information is available:

Question 79

For a merchandiser,how is Interest Revenue classified on the income statement?

A)Income from Discontinued Operations
B)Extraordinary item
C)Other Revenues and Gains
D)Operating Expenses

Question 80

Assume it is the first year of operations.When taxable income exceeds pretax accounting income,accountants record a(n):

A)Deferred Tax Asset.
B)Deferred Tax Liability.
C)Income Tax Payable.
D)Prepaid Income Taxes.