Deck 12: Income and Changes in Retained Earnings

Question 1

Recent rulings by the SEC now require all corporations to prepare an expanded version of the Statement of Retained Earnings showing all equity accounts and their changes for the last three years.

Answer 1

False

Question 2

The FASB has not compiled a comprehensive list of what is considered to be an extraordinary item, thus the determination is a matter of judgment.

Answer 2

True

Question 3

The price earnings ratio is based on expected future earnings, while the earnings per share ratio is based on historical earnings.

Answer 3

True

Question 4

A prior period adjustment to retained earnings is made when a discovery of a material error was made to prior years' income.

Question 5

A stock split changes the par value of a stock, whereas a stock dividend does not.

Question 6

Extraordinary items and the results of discontinued operations are shown in the income statement net of any related income tax effects.

Question 7

An extraordinary item appears on the income statement before the section on discontinued operations.

Question 8

A statement of stockholders' equity is not a required financial statement and need not be prepared along with a statement of retained earnings.

Question 9

In determining earnings per share when a preferred stock has dividends in arrears, only the current year's dividend is deducted to arrive at earnings per share.

Question 10

When a corporation presents both "basic" and "diluted" earnings per share, basic earnings per share will be the smaller of the two figures.

Question 11

Comprehensive income differs from net income in that it includes events that are recognized but not realized.

Question 12

When a small (under 10%) stock dividend is declared, the market value of the stock is transferred from Retained Earnings into other stockholder equity accounts.

Question 13

In order for a loss on the disposal of a discontinued operation to be classified on the income statement as a discontinued operation, it must be unusual in nature.

Question 14

The amount of cash dividends paid to common stockholders is part of the computation of earnings per share.

Question 15

Diluted earnings per share are shown to alert investors that earnings per share could be increased by the effects of conversions of securities into common stock.

Question 16

Diluted earnings per share represents a hypothetical case, showing what earnings per share would be if certain securities were converted into additional shares of common stock.

Question 17

Earnings per share is equal to net income applicable to common stock, divided by the weighted number of common shares outstanding.

Question 18

Comprehensive income is a component of net income.

Question 19

In order to receive a dividend, a stockholder must have owned the stock as of the declaration date.

Question 20

A stock dividend provides a stockholder with more shares of stock, but his or her percentage of ownership in the company is no larger than before.

Question 21

Large stock dividends tend to keep stock prices down.

Question 22

Treasury stock appears as:

A) An asset account.
B) A liability account.
C) An expense account.
D) An equity account.

Question 23

Extraordinary items are found on the income statement:

A) Before discontinued operations.
B) After discontinued operations.
C) Before income from continuing operations.
D) After prior period adjustments.

Question 24

A small stock dividend is recorded at:

A) Market value.
B) Book value.
C) Par value.
D) No amount, just a memorandum entry is required.

Question 25

The expropriation (seizure of) of a multinational company's assets by a government is an example of a discontinued operation item.

Question 26

According to the Sarbanes-Oxley Act, lying to an external auditor can create a criminal penalty as well as a civil penalty.

Question 27

A company had 125,000 shares of common stock outstanding on January 1 and then sold 35,000 additional shares on March 30. Net income for the year was $594,750. What are earnings per share?

A) $4.73.
B) $4.58.
C) $3.93.
D) $6.61.

Question 28

Stock dividends and stock splits do not cause a change in the total amount of stockholders' equity.

Question 29

Comprehensive income may be presented in a statement with net income, in a separate statement, or as part of stockholders' equity.

Question 30

Discontinued operations should be shown on the statement of retained earnings net of taxes.

Question 31

Stock splits are always in a 2 for 1 ratio.

Question 32

In an attempt to appeal to investors, a company may be tempted to overstate net income.

Question 33

Prior period adjustments are shown in the financial statements by adjusting the beginning balance of retained earnings in the statement of retained earnings.

Question 34

The amount transferred out of retained earnings when a 4% stock dividend is declared is equal to the prevailing market value per share times the number of dividend shares to be distributed.

Question 35

The statement of stockholders' equity discloses the amount of cash dividends as well as stock dividends declared during the current year.

Question 36

A company failed to make an adjusting entry in the prior year to accrue earned revenue. To correct this they should:

A) Correct last year's statement by increasing net income.
B) Correct this year's statements with a prior period adjustment increasing beginning retained earnings.
C) Correct this year's statements with a prior period adjustment decreasing beginning retained earnings.
D) Correct this year's statements with a prior period adjustment increasing ending retained earnings.

Question 37

Stock splits:

A) Allow management to conserve cash.
B) Give stockholders more shares.
C) Cause no change in total assets, liabilities, or stockholders' equity.
D) Allow management to conserve cash, give stockholders more shares, and cause no change in total assets, liabilities, or stockholders' equity.

Question 38

"Discontinued operations" is an example of an extraordinary item.

Question 39

It would be reasonable to assume that:

A) Basic earnings per share should exceed diluted earnings per share.
B) Diluted earnings per share should exceed basic earnings per share.
C) Basic earnings per share should be equal to diluted earnings per share.
D) Basic earnings per share would not be presented with diluted earnings per share.

Question 40

Prior period adjustments appear in the statement of retained earnings and in the income statement for the current year.

Question 41

Which of the following statistics is generally computed for both common and preferred stock?

A) Earnings per share.
B) Price-earnings ratio (p/e ratio).
C) Annual dividend per share.
D) Retained earnings per share.

Question 42

The numerator in calculating earnings per share is reduced for:

A) Preferred dividends.
B) Common dividends.
C) Common stock dividends.
D) Any form of dividend.

Question 43

An example of an extraordinary gain or loss is:

A) A large loss arising from inability to collect an account receivable from a bankrupt customer.
B) A large gain from disposal of a segment of the business.
C) A gain or loss from sale of an expensive machine no longer needed in the business.
D) A loss due to the expropriation of assets by a foreign government.

Question 44

The price-earnings ratio is the:

A) Book value of a share of common stock divided by EPS.
B) Market price of a share of common stock divided by EPS.
C) Par value of a share of common stock divided by EPS.
D) Market price divided by book value of a share of stock.

Question 45

The purpose of developing the subtotals "Income before Extraordinary Items" and "Income from Continuing Operations" in an income statement is to:

A) Assist investors in forecasting future operating results.
B) Increase the amount of reported net income.
C) Decrease the amount of income subject to income taxes.
D) Provide investors with the information necessary to compute earnings per share.

Question 46

Doogle Corporation sold a segment of its operations in 2009 and suffered an extraordinary loss in 2010. Which of the following would be the most useful in attempting to predict Doogle's performance for 2011?

A) Doogle's income from continuing operations in 2009 and 2010.
B) Doogle's net income in 2009 and 2010.
C) Doogle's total assets at the end of 2010.
D) Doogle's retained earnings at the end of 2010.

Question 47

Execucomp Corporation's financial statements in the current year show a loss from discontinued operations, a prior period adjustment, and an extraordinary gain. If Execucomp's income statement is prepared according to generally accepted accounting principles (as illustrated in your text), which of the following four items would appear second in sequence in the income statement?

A) Prior period adjustment.
B) Income from continuing operations.
C) Loss from discontinued operations.
D) Extraordinary gain.

Question 48

The amount of earnings per share is usually computed:

A) For both preferred and common stock.
B) For common stock by deducting the dividends on preferred stock from net income and dividing the remaining amount by the weighted average number of common shares outstanding.
C) By dividing net income by the combined number of preferred and common shares.
D) On the basis of the number of shares outstanding at year-end, regardless of changes in the number of shares during the year.

Question 49

Earnings per share figures are shown in the income statement:

A) For income before extraordinary items and for income from continuing operations, as well as for net income.
B) For common stock as well as for preferred stock.
C) For all publicly owned, as well as for all privately held, corporations.
D) As an optional disclosure for all corporations, and may be omitted completely or disclosed in a footnote at the option of the issuing corporation.

Question 50

The common stock of Securetech Corporation consistently sells at a market price of 20 times earnings . What would be the most likely effect of a 10 cent increase in Securetech's basic EPS?

A) An increase in market price of approximately 10 cents per share.
B) An increase in market price of approximately $2 per share.
C) A reduction in the p/e ratio due to the larger EPS.
D) Nothing, since market price reflects expectations of future earnings.

Question 51

A prior period adjustment is a correction made to:

A) Retained earnings of the beginning of the period.
B) Retained earnings at the end of the period.
C) Net income of the current year.
D) Only to last years' financial statements.

Question 52

Large stock dividends tend to:

A) Increase stock prices.
B) Have no effect upon stock prices.
C) Keep stock prices down.
D) Describe total assets.

Question 53

Which of the following would have no effect on Retained Earnings?

A) Declaration of a cash dividend.
B) Declaration of a stock dividend.
C) Declaration of a stock split.
D) A prior period adjustment.

Question 54

Which of the following has no effect on the computation of earnings per share for the current period?

A) The amount of cash dividends declared or paid to preferred stockholders.
B) The amount of cash dividends declared or paid to common stockholders.
C) Net income.
D) The number of shares of common stock authorized.

Question 55

All things being equal, if investors expect earnings to increase substantially from current levels, the price/earnings ratio will:

A) Be quite low.
B) Be quite high.
C) Not change.
D) Not be affected by income expectations.

Question 56

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

A) A large gift given to the company.
B) A loss from obsolete inventory.
C) A loss from a natural disaster that affects the company at infrequent intervals.
D) A loss from an enacted law that made inventory unsalable.

Question 57

Of the items listed, which would appear closest to the bottom of the income statement?

A) Extraordinary items.
B) Prior period adjustment.
C) Income from continuing operations.
D) Discontinued operations.

Question 58

On January 31, 2009, Village Bank had 500,000 shares of $2 par value common stock outstanding. On that date, the company declared a 14% stock dividend when the market price of the stock was $37 per share. The immediate effect of this dividend upon Village Bank was:

A) A reduction in cash of $2,590,000.
B) A reduction in retained earnings of $2,590,000.
C) A reduction in retained earnings of $140,000.
D) A liability to the stockholders of $140,000.

Question 59

To qualify as an extraordinary item, a gain or loss must:

A) Affect the income of a prior period.
B) Be larger in amount than any other item in the income statement.
C) Be material in amount, unusual in nature, and not expected to recur.
D) Be associated with a segment of the business that has been discontinued during the current period.

Question 60

In computing earnings per share, the number of shares used is:

A) The year-end number of shares outstanding.
B) The beginning of the year number of shares outstanding.
C) The average of the beginning and the year-end number of shares outstanding.
D) The weighted average of shares outstanding for the year.

Question 61

When a stock dividend is declared, total stockholders' equity will:

A) Decrease.
B) Increase.
C) Not change.
D) Increase or decrease, depending upon certain variables.

Question 62

Dividends become a liability of a corporation:

A) On the date the board of directors declares the dividend.
B) On the date of record.
C) On the date payment is to be made.
D) When cumulative preferred stock dividends are in arrears.

Question 63

Diluted earnings per share is a hypothetical computation to warn stockholders what could happen if:

A) Loss contingencies turn out adversely.
B) Convertible securities are converted into shares of common stock.
C) Extraordinary losses were to recur.
D) Consideration was given to the loss from operations discontinued during the current period.

Question 64

To receive the next cash dividend, an investor must purchase the stock before the:

A) Dividend declaration date.
B) Ex-dividend date.
C) Date of record.
D) Payment date announced by the board of directors.

Question 65

A prior period adjustment appears in the financial statements of the current year when:

A) An error was made in computing the net income of the current period.
B) An error was made in measuring the net income of a previous year or years.
C) An extraordinary loss in a prior year was included among normal results of operations in the prior year.
D) Earnings per share figures from prior years are restated to reflect the increased number of shares outstanding due to a stock split or a stock dividend.

Question 66

Dividends are first recorded and retained earnings are reduced on:

A) The ex-dividend date.
B) The date of record.
C) The date of declaration.
D) The date of payment.

Question 67

A liquidating dividend:

A) Occurs when a corporation distributes shares of its own stock as a dividend, rather than cash.
B) Occurs whenever a corporation distributes non-cash assets as a dividend to its stockholders.
C) Represents a distribution of a corporation's profits to the stockholders.
D) Represents a return of invested capital to a corporation's owners, the stockholders.

Question 68

If a material accounting error was made in a prior year, that error:

A) Should be reflected on the current year's income statement.
B) Should be reflected, net of taxes, on the retained earnings statement.
C) Should be reflected as a change in accounting principle.
D) Should be considered as an extraordinary item, and shown, net of taxes, on the income statement.

Question 69

A large stock dividend and a stock split are similar in that they both cause a:

A) Reduction in total stockholders' equity.
B) Reduction in retained earnings.
C) Reduction in the par value per share.
D) Reduction in the market price per share.

Question 70

After preparing the financial statements for 2011, the accountant for the Dawson Corporation discovered that a prior period adjustment had been omitted from the 2009 financial statements. Which of the following is most likely to require correction as a result of this oversight?

A) Earnings per share as originally computed.
B) Net income for 2011 as originally reported.
C) Ending retained earnings at December 31, 2011.
D) Extraordinary items as originally reported.

Question 71

Which of the following would be treated as a prior period adjustment by Gold Corporation in 2010?

A) In 2010, it was discovered that Gold Corporation recorded the purchase of a warehouse in 2007 as a debit to Repairs Expense.
B) In 2010, Gold Corporation switched from the straight-line method of depreciation to another method of computing depreciation.
C) In 2010, Gold Corporation's management decided that the estimated useful life of its computer equipment should be changed from five years to nine years.
D) In 2010, Gold Corporation sold a segment of the business that it has operated since 1996.

Question 72

Declaration and distribution of a stock dividend cause each of the following effects except:

A) An increase in the number of shares of stock outstanding.
B) A decrease in retained earnings.
C) A decrease in total assets of the issuing corporation.
D) An increase in legal capital of the issuing corporation.

Question 73

A prior period adjustment appears in:

A) The income statement following the subtotal "Income before Prior Period Adjustments."
B) The statement of retained earnings, as an adjustment to the ending balance of retained earnings.
C) Footnotes to the financial statements.
D) The statement of retained earnings, as an adjustment to the beginning balance of retained earnings.

Question 74

A restriction of retained earnings:

A) Reduces the dollar amount of retained earnings shown in the balance sheet.
B) Appears in the statement of retained earnings as a reduction of ending retained earnings.
C) Appears in the liability section of the balance sheet.
D) Limits the dollar amount of dividends a corporation may declare.

Question 75

As a result of a 5% stock dividend:

A) Total stockholders' equity decreases by 5%.
B) The par value per share decreases by 5%.
C) The number of shares owned by each stockholder increases by 5%, but total stockholders' equity does not change.
D) Both the number of shares outstanding and the total stockholders' equity increase by 5%.

Question 76

When a company reports both diluted earnings per share and basic earnings per share:

A) Basic EPS would be greater than fully diluted EPS.
B) Basic EPS would be less than fully diluted EPS.
C) Basic EPS may be either greater or less than fully diluted EPS.
D) Both should never be shown - only one would be reported.

Question 77

Comprehensive income can be displayed to users of financial statements in which of the following way(s):

A) As a second income statement.
B) As a single income statement that includes both the components of net income and the components of other comprehensive income.
C) As an element in the changes in stockholders' equity displayed as a column in the statement of stockholders' equity.
D) Either as a second income statement, as a single income statement that includes both the components of net income and the components of other comprehensive income, or as an element in the changes in stockholders' equity displayed as a column in the statement of stockholders' equity.

Question 78

Supervox Corporation declared a 3-for-2 common stock split, but this transaction was erroneously recorded as a 50% common stock dividend. As a result:

A) Retained earnings is understated.
B) The total dollar amount of stockholders' equity is overstated.
C) The corporate records do not show the correct number of shares of common stock outstanding.
D) The common stock account is understated.

Question 79

A 2-for-1 stock split:

A) Is accounted for in the same way as a 100% stock dividend.
B) Increases the number of outstanding shares of common stock, but par value per share remains the same as before the split.
C) Is recorded by transferring the par value of additional shares from retained earnings to the common stock account.
D) Should logically cause the market price per share to drop by approximately 50%.

Question 80

If a company presents both the basic and diluted earnings per share, the price/earnings ratio is based on:

A) The basic figure.
B) The diluted figure.
C) The average of the basic and diluted figures.
D) A combination of the basic and diluted figures.