Deck 14: The Corporate Income Statement and the Statement of Stockholders Equity

Question 1

Corporate income statements must be prepared in multistep form.

Answer 1

False

Question 2

Non-operating items will generally reduce a company's quality of earnings.

Answer 2

True

Question 3

Discontinued operations are considered non-operating items.

Answer 3

True

Question 4

Write-downs and restructurings are often an indication of bad management decisions in the past.

Question 5

"Big baths" commonly occur when a company is having a good year.

Question 6

Income tax allocation procedures are applied to comply with the matching principle.

Question 7

A write-down is another term for a restructuring.

Question 8

The quality of a company's earnings is affected by the accounting estimates chosen by the company's management.

Question 9

A corporation's actual income taxes payable is computed in accordance with generally accepted accounting principles.

Question 10

An analysis of the nature of nonoperating items is important in judging the quality of the net income figure.

Question 11

In general, an accounting method or estimate that results in a higher current earnings produces a better quality of operating income.

Question 12

A company with a high quality of earnings is one that has earned a substantial profit for the period.

Question 13

If the amount of income taxes expense exceeds the amount of actual income taxes payable for a year, the difference is recorded by a debit to a balance sheet account called Deferred Income Taxes.

Question 14

The only possible change in the Deferred Income Taxes account balance for a period is due to the difference between the amount of income taxes expense for that period and the amount of income taxes actually payable to the IRS for the period.

Question 15

The quality of earnings is an indication of the sustainability of earnings into future accounting periods.

Question 16

Extraordinary gains and losses are a component of income from operations.

Question 17

Both restructurings and write-downs reduce current operating income.

Question 18

The write-off of goodwill that has been impaired is a component of income from operations.

Question 19

The amount of income taxes expense appearing on a corporation's income statement must be calculated in accordance with the matching principle.

Question 20

A gain on the sale of an asset is a component of income from operations.

Question 21

The federal income tax is progressive in nature.

Question 22

The discrepancy between methods used for accounting purposes and methods used for tax purposes causes items in the financial statements to be shown "net of tax."

Question 23

Deferred Income Taxes is classified as an asset when it has a debit balance.

Question 24

Discontinued operations and extraordinary items should be reported in the financial statements "net of tax."

Question 25

Earnings per share information need not be shown for extraordinary gains and losses.

Question 26

A large uninsured loss from a fire is treated on the income statement as an extraordinary item.

Question 27

On the income statement, all income taxes should be centralized in the Income Taxes Expense account.

Question 28

For an item to be treated as extraordinary, it must be unusual in nature and occur infrequently.

Question 29

Income tax allocation is necessary because tax rates differ at different levels of income.

Question 30

The results of discontinued operations are excluded from operating income on the income statement.

Question 31

The income statement's bottom-line figure (net income or loss) must be shown "net of tax."

Question 32

Extraordinary gains and losses must be shown in the financial statements "net of tax."

Question 33

A corporation is subject to a federal flat income tax rate of 34 percent.

Question 34

Gains and losses from the takeover of property by a foreign government are treated as discontinued operations.

Question 35

The results of discontinued operations appear below extraordinary gains and losses in the income statement.

Question 36

Gains and losses caused by the passage of a new law should be classified as extraordinary on the income statement.

Question 37

A company with a simple capital structure is required to report both basic and diluted earnings per share.

Question 38

Gains and losses from the sale of plant assets should be classified as extraordinary on the income statement.

Question 39

One objective of the corporate income statement is to separate the results of continuing operations from those of discontinued operations.

Question 40

An extraordinary loss of $250,000 that results in income tax savings of $60,000 should be reported as an extraordinary loss (net of tax) of $190,000 on the income statement.

Question 41

Net income is a component of comprehensive income.

Question 42

A statement of retained earnings is not as informative as a statement of stockholders' equity.

Question 43

The date on a statement of stockholders' equity is for a period of time rather than for a specific point in time.

Question 44

A liability arises when the board of directors declares a stock dividend.

Question 45

A company with no potentially dilutive securities is considered to have a complex capital structure.

Question 46

A convertible preferred stock will be included in the denominator of diluted earnings per common share.

Question 47

A business with 100,000 shares of stock outstanding for three months would use a weighted-average 25,000 shares in its earnings per share calculation.

Question 48

A convertible bond is a potentially dilutive security.

Question 49

A synonymous phrase for retained earnings is accumulated earnings.

Question 50

A person owning stock on the date of record will receive stock dividends that have been declared.

Question 51

The effects on individual contributed capital accounts of a conversion of preferred stock to common stock during the period are disclosed on the statement of stockholders' equity.

Question 52

A stock dividend is a pro rata distribution of cash to a corporation's stockholders.

Question 53

A business with a simple capital structure would present only basic earnings per share information in its financial statements.

Question 54

A company with convertible bonds is considered to have a complex capital structure.

Question 55

A statement of stockholders' equity cannot take the place of a statement of retained earnings.

Question 56

Investments by owners are contained in comprehensive income.

Question 57

A company with stock options is considered to have a simple capital structure.

Question 58

Retained earnings represent cash readily available for dividends.

Question 59

Diluted earnings per share should be a more conservative (lower) figure than basic earnings per share.

Question 60

A debit balance in the Retained Earnings account is referred to as a deficit.

Question 61

The consistency convention requires that

A) a company use the same independent auditors year after year.
B) all companies operating in the same industry use the same accounting methods.
C) the selection of a company's accounting policies be disclosed in its financial statements.
D) a company use the same accounting procedures year after year.

Question 62

Par value or stated value is arbitrarily set when stock is authorized.

Question 63

The book value of one share of callable preferred stock is equal to the call value of the preferred share minus any dividends in arrears.

Question 64

A 2-for-1 stock split will have the same effect on the number of shares outstanding as a 200 percent stock dividend.

Question 65

A stock dividend exceeding 20 to 25 percent is properly treated as a stock split.

Question 66

The quality of a company's earnings may be affected by the

A) industry in which the company operates.
B) choice of independent auditors.
C) accounting methods the company uses.
D) countries in which the company operates.

Question 67

A stock dividend will cause an increase in total contributed capital at the date the dividend is declared.

Question 68

In computing book value per share of common stock, common stock distributable is included in the divisor.

Question 69

Which of the following is not a component of income from operations?

A) Costs and expenses
B) Write-downs of assets
C) Extraordinary losses
D) Restructurings

Question 70

A stock split results in a transfer of the market value of the stock from Retained Earnings to Contributed Capital.

Question 71

A stock split normally increases total stockholders' equity.

Question 72

The account Common Stock Distributable is classified as a current liability.

Question 73

When common stock is originally issued, its market value per share should approximate its par or stated value per share.

Question 74

The declaration of cash dividends will decrease the book value per share of common stock.

Question 75

The write-down of an asset will affect

A) neither total assets nor net income.
B) net income, but not total assets.
C) both total assets and net income.
D) total assets, but not net income.

Question 76

Book value per share of stock represents the amount the shareholder will receive per share if the company is sold or liquidated.

Question 77

A stock dividend does not affect the total amount of stockholders' equity.

Question 78

When alternative acceptable accounting methods exist, a better quality of earnings generally is produced from selecting an accounting method that has the effect of reporting the

A) lowest amount of future earnings.
B) greatest amount of retained earnings currently.
C) lowest amount of current earnings.
D) greatest amount of assets currently.

Question 79

A stock dividend will cause an increase in the total number of shares issued and outstanding.

Question 80

A small stock dividend normally results in a transfer from Retained Earnings to Contributed Capital of an amount equal to the par value of the stock.