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

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

Income statements prepared according to both U.S. GAAP and International Financial Reporting Standards require the separate reporting, as an extraordinary item, of material gains and losses from events that are both unusual and infrequent.

Answer 3

False

Question 4

Income from continuing operations sometimes includes gains from nonoperating activities.

Question 5

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

Question 6

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

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

Question 7

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

Question 8

EPS disclosure is required only for income from continuing operations.

Question 9

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

Question 10

An item must meet the subjective criteria of being either unusual or infrequent to be reported as extraordinary.

Question 11

Freda's Florist reported the following before-tax income statement items for the year ended December 31, 2013: All income statement items are subject to a 40% income tax rate. In its 2013 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 12

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

Question 13

Intraperiod income tax presentation is primarily a matter of:

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

Question 14

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

Question 15

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

Question 16

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 separate item in the income statement:

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

Question 17

Popson Inc. incurred a material loss that was not unusual in character but was clearly an infrequent occurrence. This loss should be reported as:

A)An extraordinary loss.
B)A separate line item between income from continuing operations and income from discontinued operations.
C)A separate line item within income from continuing operations.
D)A separate line item in the retained earnings statement.

Question 18

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

Question 19

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

Question 20

The definition of what constitutes an extraordinary item should be independent of the operating environment.

Question 21

On November 1, 2013, 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, 2014. On December 31, 2013, 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, 2013, Jamison would report a before-tax loss on discontinued operations of:

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

Question 22

Suppose that the Footwear Division's assets had not been sold by December 31, 2013, but were considered held for sale. Assume that the fair value of these assets at December 31 was $40 million. In the 2013 income statement for Foxtrot Co., it would report a loss from discontinued operations of:

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

Question 23

Howard Co.'s 2013 income from continuing operations before income taxes was $280,000. Howard Co. reported a before-tax extraordinary gain of $50,000. All tax items are subject to a 40% tax rate. In its income statement for 2013, Howard Co. would show the following line-item amounts for net income and income tax expense:

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

Question 24

Cendant Corporation's results for the year ended December 31, 2013, include the following material items: Cendant Corporation's income from continuing operations before income taxes for 2013 is:

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

Question 25

What is Misty's income before extraordinary item(s)?

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

Question 26

On August 1, 2013, 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, 2014. On January 31, 2014, 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, 2014, Rocket would report a before-tax loss on discontinued operations of:

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

Question 27

What is Misty's net income for the current year?

A)$148.
B)$168.
C)$112.
D)None of the amounts given are correct.

Question 28

An extraordinary event for financial reporting purposes is both:

A)Unusual and material.
B)Infrequent and significant.
C)Material and infrequent.
D)Unusual and infrequent.

Question 29

In the 2013 income statement for Foxtrot Co., it 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 30

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 2013 income statement?

A)$2,000,000 loss.
B)$2,500,000 loss.
C)None.
D)$500,000 impairment loss included in continuing operations and a $2,000,000 loss from discontinued operations.

Question 31

Cal's Cookies reported 2013 before-tax income before extraordinary items of $152,000 and a before-tax extraordinary loss of $32,000. All tax items are subject to a 30% tax rate. In its 2013 income statement, Cal's reported the following amounts as separate line items for net income and income tax expense:

A)$120,000 and $36,000.
B)$84,000 and $45,600.
C)$84,000 and $36,000.
D)$120,000 and $45,600.

Question 32

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

A)Predictive ability.
B)Consistency in reporting.
C)Intraperiod continuity.
D)Comprehensive reporting.

Question 33

The distinction between operating and nonoperating income relates to:

A)Continuity of income.
B)Principal activities of the reporting entity.
C)Consistency of income stream.
D)Reliability of measurements.

Question 34

Pro forma 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 35

In the 2013 income statement for Foxtrot Co., it would report:

A)All income taxes would be combined into one line item.
B)Income taxes would be separated for continuing and discontinued operations.
C)Income taxes would be reported for income and gains only.
D)None of the above is correct.

Question 36

Major Co. reported 2013 income of $300,000 from continuing operations before income taxes and a before-tax extraordinary loss of $80,000. All income is subject to a 30% tax rate. In the 2013 income statement, Major Co. would show the following line-item amounts for income tax expense and net income:

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

Question 37

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 regarding disposal of long-lived assets. How should Claxton report the sale in its 2013 income statement?

A)Report it as an extraordinary item.
B)Report it as a discontinued operation, reported below income from continuing operations.
C)Report the income or loss from operations of the division in discontinued operations below continuing operations and the gain or loss from disposal in continuing operations.
D)None of the above.

Question 38

In the 2013 income statement for Foxtrot Co., it would report income from discontinued operations of:

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

Question 39

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 2013 income statement?

A)$2,000,000 loss.
B)$2,500,000 loss.
C)None.
D)$500,000 gain included in continuing operations and a $2,000,000 loss from discontinued operations.

Question 40

Suppose that the Footwear Division's assets had not been sold by December 31, 2013, but were considered held for sale. Assume that the fair value of these assets at December 31 was $80 million. In the 2013 income statement for Foxtrot Co., under discontinued operations it would report a:

A)$6 million loss.
B)$10 million loss.
C)$13.2 million income.
D)None of the above is correct.

Question 41

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

A)Foreign currency translation gains.
B)Unrealized gains on investments accounted for as securities available for sale.
C)Deferred gains from derivatives.
D)Gains from the sale of equipment.

Question 42

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 43

Operating cash flows would exclude:

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

Question 44

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 45

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 separately for extraordinary items.
D)It must be reported on operating income.

Question 46

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 47

The Maytag Corporation's income statement includes income from continuing operations, a loss from discontinued operations, and extraordinary items. 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 from discontinued operations, and net income only.
D)Income from continuing operations, loss from discontinued operations, extraordinary items, and net income.

Question 48

Which of the following is added to net income as an adjustment under the indirect method of preparing the statement of cash flows?

A)Salaries payable decrease.
B)Gain on the sale of land.
C)Loss on the sale of equipment.
D)Accounts receivable increase.

Question 49

Tropical Tours reported revenue of $400,000 for its year ended December 31, 2013. Accounts receivable at December 31, 2012 and 2013, were $35,000 and $32,000, respectively. Using the direct method for reporting cash flows from operating activities, Tropical Tours would report cash collected from customers of:

A)$400,000.
B)$397,000.
C)$403,000.
D)$365,000.

Question 50

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 the above are acceptable methods.

Question 51

Cash flows from investing activities do not include:

A)Proceeds from issuing bonds.
B)Payment for the purchase of equipment.
C)Proceeds from the sale of marketable securities.
D)Cash outflows from acquiring land.

Question 52

The FASB's stated preference for reporting operating cash flows is the:

A)Indirect method.
B)Direct method.
C)Working capital method.
D)All financial resources method.

Question 53

Reporting comprehensive income according to International Financial Reporting Standards 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 54

In the operating activities section of the statement of cash flows, we start with net income:

A)In the direct method.
B)In the indirect method.
C)In both the direct and the indirect methods.
D)In neither the direct nor the indirect methods.

Question 55

Cash flows from financing activities include:

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

Question 56

Reconciliation between net income and comprehensive income would include:

A)Unrealized losses but not unrealized gains on available for sale securities.
B)Unrealized gains but not unrealized losses on available for sale securities.
C)Unrealized losses and unrealized gains on available for sale securities.
D)Neither unrealized losses nor unrealized gains on available for sale securities.

Question 57

Cash flows from investing do not include cash flows from:

A)Lending money to another corporation.
B)The sale of equipment.
C)Borrowing.
D)The purchase of other corporation's securities.

Question 58

Operating cash outflows would include:

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

Question 59

Comprehensive income is the change in equity from:

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

Question 60

Schneider Inc. had salaries payable of $60,000 and $90,000 at the end of 2012 and 2013, respectively. During 2013, Schneider recorded $620,000 in salaries expense in its income statement. Cash outflows for salaries in 2013 were:

A)$590,000.
B)$620,000.
C)$650,000.
D)$530,000.

Question 61

Paris Company reported the following items in its December 31, 2013, year-end adjusted trial balance: Paris is subject to a 40% income tax rate.
Required:
Prepare the December 31, 2013, income statement for Paris Company starting with income from continuing operations before income taxes.

Question 62

Arrow Printers paid $2,000 interest on short-term notes payable, $10,000 interest on long-term bonds, and $6,000 in dividends on its common stock. Arrow would report cash outflows from activities, as follows:

A)Operating, $2,000; financing, $16,000.
B)Operating, $0; financing, $18,000.
C)Operating, $12,000; financing, $6,000.
D)Operating, $18,000; financing, $0.

Question 63

Scenario 1: Assume that Jacob sold the division's assets on December 31, 2013, for $24 million. The book value of the division's assets was $19 million at that date. Under these assumptions, what would Jacob report in its 2013 income statement regarding the office equipment division? Explain where this information would be presented.

Question 64

Expenses in an income statement prepared under International Financial Reporting Standards:

A)Must be classified by function.
B)Must be classified by natural description.
C)Can be classified either by function or by natural description.
D)None of the above is correct.

Question 65

Scenario 2: Assume that Jacob had not yet sold the division's assets by the end of 2013. Further, assume that the fair value less costs to sell of the division's assets at December 31, 2013, was $24 million and was expected to remain the same when the assets are sold in 2014. The book value of the division's assets was $19 million at the end of the year. Under these assumptions, what would Jacob report in its 2013 income statement regarding the office equipment division? Explain where this information would be presented.

Question 66

Required:
Prepare a single-step income statement with basic earnings per share disclosure.

Question 67

Shady Lane's income tax payable account decreased from $14 million to $12 million during 2013. If its income tax expense was $80 million, what was shown as an operating cash flow under the direct method?

A)A cash outflow of $12 million.
B)A cash outflow of $78 million.
C)A cash outflow of $80 million.
D)A cash outflow of $82 million.

Question 68

Rowdy's would report net cash inflows (outflows) from investing activities in the amount of:

A)$(4,000).
B)$100.
C)$(3,900).
D)$(1,900).

Question 69

Hong Kong Clothiers reported revenue of $5,000,000 for its year ended December 31, 2013. Accounts receivable at December 31, 2012 and 2013, were $320,000 and $355,000, respectively. Using the direct method for reporting cash flows from operating activities, Hong Kong Clothiers would report cash collected from customers of:

A)$4,965,000.
B)$5,000,000.
C)$5,035,000.
D)$5,045,000.

Question 70

Bird Brain Co. reported net income of $45,000 for the year ended December 31, 2013. January 1 balances in accounts receivable and accounts payable were $23,000 and $26,000 respectively. Year-end balances in these accounts were $22,000 and $28,000, respectively. Assuming that all relevant information has been presented, Bird Brain's cash flows from operating activities would be:

A)$48,000.
B)$44,000.
C)$46,000.
D)$45,000.

Question 71

Shively Mfg. Co. sold for $18,000 equipment that cost $40,000 and had a book value of $30,000. Shively would report:

A)Operating cash inflows of $18,000.
B)Operating cash inflows of $8,000.
C)Financing cash inflows of $18,000.
D)Investing cash inflows of $18,000.

Question 72

Nevada Boot Co. reported net income of $216,000 for its year ended December 31, 2013. Purchases totaled $152,000. Accounts payable balances at the beginning and end of the year were $36,000 and $33,000, respectively. Beginning and ending inventory balances were $44,000 and $46,000, respectively. Assuming that all relevant information has been presented, Nevada Boot would report operating cash flows of:

A)$155,000.
B)$221,000.
C)$211,000.
D)$151,000.

Question 73

Jacobsen Corporation prepares its financial statement applying International Financial Reporting Standards. During its 2013 fiscal year, the company reported before-tax income of $620,000. This amount does not include the following two items, both of which are considered to be material in amount: The company's income tax rate is 40%. In its 2013 income statement, Jacobsen would report income from continuing operations of:

A)$312,000.
B)$372,000.
C)$492,000.
D)$620,000.

Question 74

Rowdy's would report net cash inflows (outflows) from operating activities in the amount of:

A)$(80).
B)$120.
C)$200.
D)$420.

Question 75

Scenario 3: Assume that Jacob had not yet sold the office furniture division by the end of 2013. Further, assume that the fair value less costs to sell of the division's assets at December 31, 2013, was $12 million and was expected to remain the same when the assets are sold in 2014. The book value of the division's assets was $19 million at the end of the year. Under these assumptions, what would Jacob report in its 2013 income statement regarding the office equipment division? Explain where this information would be presented.

Question 76

Lucia Ltd. reported net income of $135,000 for the year ended December 31, 2013. January 1 balances in accounts receivable and accounts payable were $29,000 and $26,000, respectively. Year-end balances in these accounts were $30,000 and $24,000, respectively. Assuming that all relevant information has been presented, Lucia's cash flows from operating activities would be:

A)$132,000.
B)$134,000.
C)$136,000.
D)$138,000.

Question 77

In a statement of cash flows prepared under International Financial Reporting Standards, each of the following items is typically classified as a financing cash flow except:

A)Interest paid.
B)Dividends paid.
C)Proceeds from the issuance of long-term debt.
D)Dividends received.

Question 78

Jacobsen Corporation prepares its financial statement applying U.S. GAAP. During its 2013 fiscal year, the company reported before-tax income of $620,000. This amount does not include the following two items, both of which are considered to be material in amount: The company's income tax rate is 40%. In its 2013 income statement, Jacobsen would report income from continuing operations of:

A)$312,000.
B)$372,000.
C)$492,000.
D)$620,000.

Question 79

Rowdy's would report net cash inflows (outflows) from financing activities in the amount of:

A)$1,100.
B)$(1,100).
C)$820.
D)$900.

Question 80

Canton Corporation reported the following items in its adjusted trial balance for the year ended December 31, 2013: Canton is subject to a 30% tax rate.
Required:
Prepare the December 31, 2013, income statement for Canton Corporation, starting with income from continuing operations before income taxes.