Deck 4: The Income Statement, Comprehensive Income, and the Statement of Cash Flows

Question 1

A change in accounting principle that is implemented using the retrospective approach includes restating financial statements of all periods presented as if the new standard had been used in those periods.

Answer 1

True

Question 2

Restructuring costs most often refer to costs associated with management's plans to materially change the scope of business operations or the manner in which they are conducted.

Answer 2

True

Question 3

Material restructuring costs are reported as an element of income from continuing operations.

Answer 3

True

Question 4

A change in accounting principle that is implemented using the modified retrospective approach includes implementing the change in the current period only and not adjusting for the cumulative effects on prior periods.

Question 5

Interest expense typically is considered a temporary component of earnings.

Question 6

The single-step format of the income statement first lists all the revenues and gains included in income from continuing operations.

Question 7

Earnings quality refers to the ability of reported earnings (income) to predict future earnings.

Question 8

Income from continuing operations consists only of those items expected to be permanent components of earnings.

Question 9

Gains, but not losses, from discontinued operations must be separately reported in an income statement.

Question 10

The multiple-step format of the income statement reports a series of intermediate subtotals such as gross profit, operating income, and income before taxes.

Question 11

Intraperiod tax allocation is the process of associating income tax effects with the income statement components that create those effects.

Question 12

The single-step format of the income statement does not separately report nonoperating gains in the revenues section of the income statement.

Question 13

Material errors in prior periods' income statements are corrected by making an adjustment to the beginning balance of the current period's retained earnings.

Question 14

Income from continuing operations sometimes includes gains from nonoperating activities.

Question 15

Earnings per share disclosure is required only for income from continuing operations.

Question 16

Comprehensive income is the total change in shareholders' equity that occurred during the period.

Question 17

Changes in estimates are accounted for using the prospective approach.

Question 18

Comprehensive income reports an expanded version of income to include certain types of gains and losses not included in traditional income statements.

Question 19

The direct and indirect methods of reporting the statement of cash flows present different information for investing and financing activities.

Question 20

Income statements prepared according to both U.S. GAAP and International Financial Reporting Standards (IFRS) require the separate reporting of discontinued operations.

Question 21

Earnings quality refers to:

A) the ability of management to budget for expenditures in the following year.
B) the ability of management to sell its inventory for a profit.
C) the ability of management to quickly collect cash from customers.
D) the ability of reported earnings to predict a company's future earnings.

Question 22

Income smoothing refers to:

A) the ability of management to report an earnings amount in each period less than actual earnings.
B) the ability of management to use accruals to reduce the volatility of reported earnings over time.
C) the ability of management to maintain sales to its current customers for several years.
D) the ability of management to report an earnings amount in each period greater than actual earnings.

Question 23

Most real-world income statements are presented using which format?

A) Income-step.
B) Single-step.
C) Magnitude-step.
D) Multiple-step.

Question 24

Freda's Florist reported the following before-tax income statement items for the year ended December 31, 2018: All income statement items are subject to a 40% income tax rate. In its 2018 income statement, Freda's separately stated income tax expense and total income tax expense would be:

A) $128,000 and $128,000, respectively.
B) $128,000 and $100,000, respectively.
C) $100,000 and $128,000, respectively.
D) $100,000 and $100,000, respectively.

Question 25

Provincial Inc. reported the following before-tax income statement items: Provincial has a 30% income tax rate. Provincial would report the following amount of income tax expense as a separately stated line item in the income statement:

A) $198,000.
B) $180,000.
C) $168,000.
D) $150,000.

Question 26

The difference between single-step and multiple-step income statements is primarily an issue of:

A) Consistency.
B) Presentation.
C) Measurement.
D) Valuation.

Question 27

The decomposition of return on assets illustrates why some companies with low profit margins can be very profitable if their asset turnover is high.

Question 28

In a statement of cash flows prepared under International Financial Reporting Standards (IFRS), interest paid is most often classified as a financing cash flow.

Question 29

A primary advantage of the multiple-step format of the income statement over the single-step format is that the multiple-step format:

A) classifies expenses by function.
B) results in a higher amount of net income.
C) separately lists income tax expense.
D) lists revenues and expenses in order of their dollar amount.

Question 30

A decrease in the receivables turnover ratio indicates a decrease in the time between credit sales and cash collection.

Question 31

Return on shareholders' equity is increased if a firm can maintain its return on assets but increase its leverage.

Question 32

International Financial Reporting Standards (IFRS) require a company to classify expenses in an income statement by function.

Question 33

Intraperiod income tax presentation is primarily a matter of:

A) Valuation.
B) Going concern.
C) Periodicity.
D) Allocation.

Question 34

The relationship between revenue from selling inventory and the cost of that inventory is measured as:

A) Net income.
B) Gross profit.
C) Income before taxes.
D) Operating income.

Question 35

Financial statement users typically begin their assessment of permanent earnings with:

A) sales revenue.
B) income from continuing operations.
C) net income.
D) gross profit.

Question 36

In a statement of cash flows prepared under International Financial Reporting Standards (IFRS), interest received is most often classified as an operating cash flow.

Question 37

Managers may engage in classification shifting by:

A) reporting sales to fictitious customers to inflate reported revenues.
B) reduce estimates of accrued expenses to inflate reported net income.
C) reporting operating expenses as nonoperating expenses to inflate reported operating income.
D) increasing estimates of accrued expenses to inflate reported net income.

Question 38

Popson Inc. incurred a material loss that was unusual in character. This loss should be reported as:

A) a discontinued operation.
B) a line item between income from continuing operations and income from discontinued operations.
C) a line item within income from continuing operations.
D) a line item in the retained earnings statement.

Question 39

Which of the following profit amounts usually will be listed in both the single-step and multiple-step formats of the income statement?

A) Gross profit.
B) Operating income.
C) Income before taxes.
D) Net nonoperating income.

Question 40

A company could improve its return on assets by increasing its income or by increasing its total assets.

Question 41

Non-GAAP earnings:

A) could be considered management's view of permanent earnings.
B) are needed for the correction of errors.
C) are standardized under generally accepted accounting principles.
D) are useful to compare two different firms' performance.

Question 42

Which of the following mostly likely would be classified as restructuring costs?

A) Advertising costs to sell a product recently developed by a company.
B) Severance pay for employee layoffs associated with facility closings.
C) Brokerage fees from the issuance of additional shares of stock.
D) Acquisition fees associated with the purchase of land and buildings.

Question 43

The principal benefit of separately reporting discontinued operations is to enhance:

A) predictive ability of future profitability.
B) consistency in reporting.
C) intraperiod continuity.
D) comprehensive reporting.

Question 44

On August 1, 2018, Rocket Retailers adopted a plan to discontinue its catalog sales division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by June 30, 2019. On January 31, 2019, Rocket's fiscal year-end, the following information relative to the discontinued division was accumulated: In its income statement for the year ended January 31, 2019, Rocket would report a before-tax loss on discontinued operations of:

A) $(115,000).
B) $(195,000).
C) $(65,000).
D) $(125,000).

Question 45

On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for $80 million. The sale was completed on December 31, 2018. The following additional facts pertain to the transaction:
• The Footwear Division qualifies as a component of the entity according to GAAP
Regarding discontinued operations.
• The book value of Footwear's assets totaled $48 million on the date of the sale.
• Footwear's operating income was a pre-tax loss of $10 million in 2018.
• Foxtrot's income tax rate is 40%.

-
In the income statement for the year ended December 31, 2018, Foxtrot Co. would report:

A) Income (loss) on its total operations for the year without separation.
B) Income (loss) on its continuing operation only.
C) Income (loss) from its continuing and discontinued operations separately.
D) Income and gains separately from losses.

Question 46

On November 1, 2018, Jamison Inc. adopted a plan to discontinue its barge division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by April 30, 2019. On December 31, 2018, the company's year-end, the following information relative to the discontinued division was accumulated: In its income statement for the year ended December 31, 2018, Jamison would report a before-tax loss on discontinued operations of:

A) $65 million.
B) $50 million.
C) $130 million.
D) $145 million.

Question 47

The Claxton Company manufactures children's toys and also has a division that makes automobile parts. Due to a change in its strategic focus, the company sold the automobile parts division. The division qualifies as a component of the entity according to GAAP. How should Claxton report the sale in its 2018 income statement?

A) Report it as restructuring costs.
B) Report it as a discontinued operation.
C) Report the income or loss from operations of the division in discontinued operations.
D) Report it as a gain on sale of investments included in income from continuing operations.

Question 48

Temporary earnings are best characterized as:

A) earnings that do not have corresponding cash flows.
B) earnings from nonoperating activities.
C) earnings that do not conform to Generally Accepted Accounting Principles (GAAP).
D) earnings that arise from events that are not likely to recur in the foreseeable future.

Question 49

The distinction between operating and nonoperating income relates to:

A) continuity of income.
B) primary activities of the reporting entity.
C) consistency of income stream.
D) reliability of measurements.

Question 50

On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for $80 million. The sale was completed on December 31, 2018. The following additional facts pertain to the transaction:
• The Footwear Division qualifies as a component of the entity according to GAAP
Regarding discontinued operations.
• The book value of Footwear's assets totaled $48 million on the date of the sale.
• Footwear's operating income was a pre-tax loss of $10 million in 2018.
• Foxtrot's income tax rate is 40%.

-
Suppose that the Footwear Division's assets had not been sold by December 31, 2018, but were considered held for sale. Assume that the fair value of these assets was $40 million at December 31, 2018. In the income statement for the year ended December 31, 2018, Foxtrot Co. would report discontinued operations of a:

A) $3 million loss.
B) $10 million loss.
C) $10.8 million loss.
D) $18 million loss.

Question 51

A common component of income excluded from the calculation of non-GAAP earnings is:

A) Interest expense.
B) Income tax expense.
C) Cost of goods sold.
D) Restructuring costs.

Question 52

On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for $80 million. The sale was completed on December 31, 2018. The following additional facts pertain to the transaction:
• The Footwear Division qualifies as a component of the entity according to GAAP
Regarding discontinued operations.
• The book value of Footwear's assets totaled $48 million on the date of the sale.
• Footwear's operating income was a pre-tax loss of $10 million in 2018.
• Foxtrot's income tax rate is 40%.

-
In the income statement for the year ended December 31, 2018, Foxtrot Co. would report income from discontinued operations of:

A) $9.2 million.
B) $13.2 million.
C) $22 million.
D) $26 million.

Question 53

Restructuring costs typically can be defined as:

A) costs of external financing through issuance of debt or equity securities.
B) costs associated safeguarding a company's assets and ensuring accuracy of financial reporting.
C) costs associated with management's plans to materially change the scope of business operations or the manner in which they are conducted.
D) costs of expenditures made on capital projects and executive compensation.

Question 54

A company reports the following amounts at the end of the current year: Under normal circumstances (ignoring tax effects), permanent earnings would be computed as:

A) $90,000.
B) $110,000.
C) $80,000.
D) $50,000.

Question 55

On October 28, 2018, Mercedes Company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations and was properly classified as held for sale on December 31, 2018, the end of the company's fiscal year. The division's loss from operations for 2018 was $2,000,000. The division's book value and fair value less cost to sell on December 31 were $3,000,000 and $3,500,000, respectively. What before-tax amount(s) should Mercedes report as loss on discontinued operations in its 2018 income statement?

A) $2,000,000 loss.
B) $2,500,000 loss.
C) No loss would be reported.
D) $500,000 gain included in continuing operations and a $2,000,000 loss from discontinued operations.

Question 56

On October 28, 2018, Mercedes Company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations and was properly classified as held for sale on December 31, 2018, the end of the company's fiscal year. The division's loss from operations for 2018 was $2,000,000. The division's book value and fair value less cost to sell on December 31 were $3,000,000 and $2,500,000, respectively. What before-tax amount(s) should Mercedes report as loss on discontinued operations in its 2018 income statement?

A) $2,000,000 loss.
B) $2,500,000 loss.
C) No loss would be reported.
D) $500,000 impairment loss included in continuing operations and a $2,000,000 loss from discontinued operations.

Question 57

Howard Co.'s 2018 income from continuing operations before income taxes was $280,000. Howard Co. reported before-tax income on discontinued operations of $50,000. All tax items are subject to a 40% tax rate. In its income statement for 2018, Howard Co. would show the following line-item amounts for income tax expense and net income:

A) $112,000 and $198,000 respectively.
B) $92,000 and $230,000 respectively.
C) $132,000 and $330,000 respectively.
D) $79,000 and $198,000 respectively.

Question 58

On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for $80 million. The sale was completed on December 31, 2018. The following additional facts pertain to the transaction:
• The Footwear Division qualifies as a component of the entity according to GAAP
Regarding discontinued operations.
• The book value of Footwear's assets totaled $48 million on the date of the sale.
• Footwear's operating income was a pre-tax loss of $10 million in 2018.
• Foxtrot's income tax rate is 40%.

-
In the income statement for the year ended December 31, 2018, Foxtrot Co. would report:

A) All income taxes combined into one line item.
B) Income taxes separated for continuing and discontinued operations.
C) Income taxes reported for income and gains only.
D) None of these answer choices are correct.

Question 59

Major Co. reported 2018 income of $300,000 from continuing operations before income taxes and a before-tax loss on discontinued operations of $80,000. All income is subject to a 30% tax rate. In the income statement for the year ended December 31, 2018, Major Co. would show the following line-item amounts for income tax expense and net income:

A) $66,000 and $210,000 respectively.
B) $90,000 and $154,000 respectively.
C) $90,000 and $276,000 respectively.
D) $66,000 and $220,000 respectively.

Question 60

On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for $80 million. The sale was completed on December 31, 2018. The following additional facts pertain to the transaction:
• The Footwear Division qualifies as a component of the entity according to GAAP
Regarding discontinued operations.
• The book value of Footwear's assets totaled $48 million on the date of the sale.
• Footwear's operating income was a pre-tax loss of $10 million in 2018.
• Foxtrot's income tax rate is 40%.

-
Suppose that the Footwear Division's assets had not been sold by December 31, 2018, but were considered held for sale. Assume that the fair value of these assets was $80 million at December 31, 2018. In the income statement for the year ended December 31, 2018, Foxtrot Co., would report discontinued operations of a:

A) $6 million loss.
B) $10 million loss.
C) $13.2 million income.
D) None of these answer choices are correct.

Question 61

Each of the following would be reported as items of other comprehensive income except:

A) foreign currency translation adjustments.
B) net unrealized holding gains on investments.
C) deferred gains from derivatives.
D) gains from the sale of equipment.

Question 62

A change in accounting principle that is implemented using the retrospective approach includes:

A) implementing the change in the current period only and not adjusting for the cumulative effects on prior periods.
B) applying the new standard to the adoption period only and recording the cumulative adjustment for prior periods to the beginning balance of retained earnings.
C) restating financial statements of all periods presented as if the new standard had been used in those periods.
D) not accounting for the change in the current period or prior periods.

Question 63

Comprehensive income is the change in equity from:

A) Owner transactions.
B) Nonowner transactions.
C) Owner or nonowner transactions.
D) Capital transactions.

Question 64

Which of the following is not true about EPS?

A) It must be reported by all corporations whose stock is publicly traded.
B) It must be reported separately for discontinued operations.
C) It must be reported on operating income.
D) None of these answer choices are correct.

Question 65

The statement of cash flows reports cash flows from the activities of:

A) operating, purchasing, and investing.
B) borrowing, paying, and investing.
C) financing, investing, and operating.
D) using, investing, and financing.

Question 66

In comparing the direct method with the indirect method of preparing the statement of cash flows:

A) only operating activities are presented differently.
B) only investing activities are presented differently.
C) only financing activities are presented differently.
D) all activities are presented differently.

Question 67

Changes in estimates are accounted for using which approach?

A) Prospective.
B) Retrospective.
C) Modified retrospective.
D) Modified prospective.

Question 68

Operating cash outflows would include:

A) Purchase of investments.
B) Purchase of equipment.
C) Payment of cash dividends.
D) Purchases of inventory.

Question 69

For the statement of cash flows, short-term Treasury bills would be included as:

A) Operating activities.
B) Investing activities.
C) Financing activities.
D) Cash equivalents.

Question 70

The Maytag Corporation's income statement includes income from continuing operations and a loss on discontinued operations. Earnings per share information would be provided for:

A) net income only.
B) income from continuing operations and net income only.
C) income from continuing operations, loss on discontinued operations, and net income only.
D) none of these answer choices are correct.

Question 71

A change in accounting principle that is implemented using the modified retrospective approach includes:

A) implementing the change in the current period only and not adjusting for the cumulative effects on prior periods.
B) applying the new standard to the adoption period only, and recording the cumulative adjustment for prior periods to the current period's beginning balance of retained earnings.
C) restating financial statements of all periods presented as if the new standard had been used in those periods.
D) not accounting for the change in the current period or prior periods.

Question 72

Reporting comprehensive income according to International Financial Reporting Standards (IFRS) can be accomplished by each of the following methods except:

A) in the statement of shareholders' equity.
B) a combined statement of income and comprehensive income.
C) in two separate statements.
D) the entity may choose either a combined statement of income and comprehensive income or two separate statements.

Question 73

Misty Company reported the following before-tax items during the current year:

-Misty's effective tax rate is 40%. What is Misty's income from continuing operations?

A) $198.
B) $210.
C) $330.
D) $360.

Question 74

Cendant Corporation's results for the year ended December 31, 2018, include the following material items: Cendant Corporation's income from continuing operations before income taxes for 2018 is:

A) $900,000.
B) $880,000.
C) $820,000
D) $320,000.

Question 75

Operating cash flows would not include:

A) Interest received.
B) Interest paid.
C) Dividends paid.
D) Dividends received.

Question 76

Misty Company reported the following before-tax items during the current year:

-Misty's effective tax rate is 40%. What is Misty's net income for the current year?

A) $148.
B) $168.
C) $112.
D) None of these answer choices are correct.

Question 77

When a material error is discovered in prior financial statements:

A) prior financial statements are restated to their correct amounts.
B) assets and liabilities in the current period are restated to their appropriate levels.
C) prior income effects are adjusted to the current period's beginning balance of retained earnings.
D) all of these answer choices are correct.

Question 78

Reporting comprehensive income can be accomplished by each of the following methods except:

A) in the statement of shareholders' equity.
B) a single, continuous statement of comprehensive income.
C) in two separate, but consecutive statements.
D) all of these answer choices are acceptable methods.

Question 79

Change statements include a:

A) retained earnings statement, balance sheet, and cash flow statement.
B) balance sheet, cash flow statement, and income statement.
C) cash flow statement, income statement, and retained earnings statement.
D) retained earnings statement, balance sheet, and income statement.

Question 80

Reconciliation between net income and comprehensive income would include:

A) unrealized holding losses but not unrealized holding gains on investments.
B) unrealized holding gains but not unrealized holding losses on investments.
C) unrealized holding losses and unrealized holding gains on investments.
D) neither unrealized holding losses nor unrealized holding gains on investments.