Question 1

An income statement shows "income before income taxes and extraordinary items" in the amount of $2,055,000.The income taxes payable for the year are $1,080,000, including $360,000 that is applicable to an extraordinary gain.Thus, the "income before extraordinary items" is
A)$1,335,000.
B)$615,000.
C)$1,395,000.
D)$675,000.

Accepted Answer

To find the "income before extraordinary items," subtract the income taxes applicable to ordinary income from the "income before income taxes and extraordinary items." The ordinary income tax is $1,080,000 - $360,000 = $720,000. Therefore, $2,055,000 - $720,000 = $1,335,000.

Question 2

When a company discontinues an operation and disposes of the discontinued operation (component), the transaction should be included in the income statement as a gain or loss on disposal reported as
A)a prior period adjustment.
B)an extraordinary item.
C)an amount after continuing operations and before extraordinary items.
D)a bulk sale of plant assets included in income from continuing operations.

Accepted Answer

According to accounting standards, the gain or loss on disposal of a discontinued operation should be reported as an amount after continuing operations and before extraordinary items. This is because the disposal of a discontinued operation is not a part of the ordinary course of business for the company and therefore, it should be reported separately from the income from continuing operations. However, it is not considered to be an extraordinary item or a prior period adjustment. Additionally, a bulk sale of plant assets included in income from continuing operations would not be appropriate as the transaction should be accounted for separately as a discontinued operation.

Question 3

The approach most companies use to provide information related to the components of other comprehensive income is a
A)second separate income statement.
B)combined income statement of comprehensive income.
C)separate column in the statement of changes in stockholders' equity.
D)footnote disclosure.

Accepted Answer

The most common approach used by companies to provide information related to the components of other comprehensive income is to present a separate column in the statement of changes in stockholders' equity. This allows for a clear presentation of the components of comprehensive income and their impact on stockholders' equity. While footnote disclosure may also be used to provide additional information, it is not the most common approach. A second separate income statement or a combined income statement of comprehensive income are not typically used as they can be confusing and less transparent than presenting the information in a separate column.

Question 4

Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business?
A)The gain or loss on disposal should be reported as an extraordinary item.
B)Results of operations of a discontinued component should be disclosed immediately below extraordinary items.
C)Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement.
D)The gain or loss on disposal should not be segregated, but should be reported together with the results of continuing operations.

Accepted Answer

Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement to provide clear information to investors about the impact of discontinued operations.

Question 5

A correction of an error in prior periods' income will be reported $$\begin{array} { l l c } 
& \text { In the income statement } & \text { Net of tax } \
\hline 
\end{array}$$
A)Yes $~~~~~~~~$ $~~~~~~~~~~~~~~~~~~~~~$  Yes
B) No$~~~~~~~~$ $~~~~~~~~~~~~~~~~~~~~~~$ No
C) Yes$~~~~~~~~$ $~~~~~ ~~~~~~~~~~~~~~~~~~$   No
D) No$~~~~~~~~$ $~~~~~~~~~~~~~~~~~~~~~~$ Yes

Accepted Answer

The answer of A correction of an error in prior...

Question 6

Fleming Company has the following items: write-down of inventories, $240,000; loss on disposal of Sports Division, $370,000; and loss due to an expropriation, $226,000.Ignoring income taxes, what total amount should Fleming Company report as extraordinary losses?
A)$226,000
B)$370,000.
C)$466,000.
D)$596,000.

Accepted Answer

The loss due to an expropriation is considered an extraordinary loss, as it is both unusual and infrequent.

Question 7

Which of the following is true about intraperiod tax allocation?
A)It arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return.
B)It is required for extraordinary items and cumulative effect of accounting changes but not for prior period adjustments.
C)Its purpose is to allocate income tax expense evenly over a number of accounting periods.
D)Its purpose is to relate the income tax expense to the items which affect the amount of tax.

Accepted Answer

Intraperiod tax allocation is used to relate the income tax expense to the items that affect the amount of tax. It is not required for extraordinary items, cumulative effect of accounting changes, or prior period adjustments. It is necessary because certain revenue and expense items appear in the income statement either before or after they are included in the tax return. The purpose of intraperiod tax allocation is not to allocate income tax expense evenly over a number of accounting periods.

Question 8

Comprehensive income includes all of the following except
A)dividend revenue.
B)losses on disposal of assets.
C)investments by owners.
D)unrealized holding gains.

Accepted Answer

Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Therefore, investments by owners (C) do not fall under comprehensive income, while the other options (dividend revenue, losses on disposal of assets, and unrealized holding gains) are included.

Question 9

Earnings per share should always be shown separately for
A)net income and gross margin.
B)net income and pretax income.
C)income before extraordinary items.
D)extraordinary items and prior period adjustments.

Accepted Answer

Earnings per share should always be shown separately for income before extraordinary items to accurately depict the ongoing profitability of the company without including one-time events.

Question 10

For Merando Company, the following information is available: $\begin{array}{lr}
\text { Cost of goods sold } & \$ 90,000 \
\text { Dividend revenue } & 4,000 \
\text { Income tax expense } & 9,000 \
\text { Operating expenses } & 35,000 \
\text { Sales } & 150,000
\end{array}$

In Merando's multiple-step income statement, gross profit
A)should not be reported
B)should be reported at $20,000.
C)should be reported at $60,000.
D)should be reported at $64,000.

Accepted Answer

Gross profit is calculated as Sales minus Cost of Goods Sold. Therefore, $150,000 (Sales) - $90,000 (Cost of Goods Sold) = $60,000.

Question 11

If plant assets of a manufacturing company are sold at a gain of $820,000 less related taxes of $250,000, and the gain is not considered unusual or infrequent, the income statement for the period would disclose these effects as
A)a gain of $820,000 and an increase in income tax expense of $250,000.
B)operating income net of applicable taxes, $570,000.
C)a prior period adjustment net of applicable taxes, $570,000.
D)an extraordinary item net of applicable taxes, $570,000.

Accepted Answer

The gain of $820,000 should be reported as an increase in operating income, and the related taxes of $250,000 should be reported as an increase in income tax expense, resulting in a net increase in income of $570,000. Option A correctly reflects this treatment. Option B is incorrect because it does not account for the taxes paid on the gain. Option C is incorrect because prior period adjustments are unrelated to the sale of plant assets. Option D is incorrect because the gain is not considered extraordinary.

Question 12

For Garret Wolfe Company, the following information is available: $\begin{array}{lr}
\text { Cost of goods sold } & \$ 60,000 \
\text { Dividend revenue } & 2,500 \
\text { Income tax expense } & 6,000 \
\text { Operating expenses } & 23,000 \
\text { Sales } & 100,000
\end{array}$

In Garret Wolfe's multiple-step income statement, gross profit
A)should not be reported
B)should be reported at $13,500.
C)should be reported at $40,000.
D)should be reported at $42,500.

Accepted Answer

Gross profit is calculated as Sales minus Cost of Goods Sold. Therefore, Gross Profit = $100,000 - $60,000 = $40,000.

Question 13

Which of the following items will not appear in the retained earnings statement?
A)Net loss
B)Prior period adjustment
C)Discontinued operations
D)Dividends

Accepted Answer

Discontinued operations will not appear in the retained earnings statement. Retained earnings statement shows changes in retained earnings from one period to another due to net income or loss, prior period adjustments, and dividends. Discontinued operations are reported separately in the income statement.

Question 14

A material item which is unusual in nature or infrequent in occurrence, but not both should be shown in the income statement $\begin{array}{cc}
&\text { Net of Tax } & \text {  Disclosed Separately } \
\hline 
\end{array}$

A) No $~~~~~~~~$ $~~~~~~~~~~~~~~~~~~~~~$  No
B) Yes$~~~~~~~~$ $~~~~~~~~~~~~~~~~~~~~~~$ Yes
C) No$~~~~~~~~$ $~~~~~ ~~~~~~~~~~~~~~~~~~$   Yes
D) Yes$~~~~~~~~$ $~~~~~~~~~~~~~~~~~~~~~~$ No

Accepted Answer

The answer of A material item which is unusual in...

Question 15

Gross billings for merchandise sold by Otto Company to its customers last year amounted to $15,720,000; sales returns and allowances were $370,000, sales discounts were $175,000, and freight-out was $140,000.Net sales last year for Otto Company were
A)$15,720,000.
B)$15,350,000.
C)$15,175,000.
D)$15,035,000.

Accepted Answer

Net sales are calculated by subtracting sales returns and allowances and sales discounts from gross billings. Thus, $15,720,000 - $370,000 - $175,000 = $15,175,000. Freight-out is not deducted from gross billings to calculate net sales.

Question 16

For Garret Wolfe Company, the following information is available: $\begin{array}{lr}
\text { Cost of goods sold } & \$ 60,000 \
\text { Dividend revenue } & 2,500 \
\text { Income tax expense } & 6,000 \
\text { Operating expenses } & 23,000 \
\text { Sales } & 100,000
\end{array}$

In Garret Wolfe's single-step income statement, gross profit
A)should not be reported.
B)should be reported at $13,500.
C)should be reported at $40,000.
D)should be reported at $42,500.

Accepted Answer

In a single-step income statement, gross profit is not reported separately. Instead, all revenues are totaled and all expenses are totaled, and the difference is reported as net income.

Question 17

Sam Hurd Company has the following items: write-down of inventories, $120,000; loss on disposal of Sports Division, $185,000; and loss due to strike, $113,000.Ignoring income taxes, what total amount should Sam Hurd Company report as extraordinary losses?
A)$ -0-.
B)$185,000.
C)$233,000.
D)$298,000.

Accepted Answer

Extraordinary losses are events that are both unusual and infrequent. A write-down of inventories and a loss due to a strike are not considered extraordinary because they can occur in the normal course of business. The loss on disposal of a division is also not extraordinary as it is part of strategic business decisions. Therefore, no extraordinary losses should be reported.

Question 18

Shank Corporation made a very large arithmetical error in the preparation of its year-end financial statements by improper placement of a decimal point in the calculation of depreciation.The error caused the net income to be reported at almost double the proper amount.Correction of the error when discovered in the next year should be treated as
A)an increase in depreciation expense for the year in which the error is discovered.
B)a component of income for the year in which the error is discovered, but separately listed on the income statement and fully explained in a note to the financial statements.
C)an extraordinary item for the year in which the error was made.
D)a prior period adjustment.

Accepted Answer

The correction of the error should be treated as a prior period adjustment, which means it should be reported in the financial statements of the prior period in which the error was made, rather than the period in which it was discovered. This is because the error affected the accuracy of the financial statements in the prior period. The correction should be reported as an adjustment to beginning retained earnings, with a corresponding adjustment to net income for the current period to reflect the impact of the correction on the current period's financial statements.

Question 19

Income taxes are allocated to
A)extraordinary items.
B)discontinued operations.
C)prior period adjustments.
D)all of these.

Accepted Answer

Income taxes may be allocated to any of the items listed (extraordinary items, discontinued operations, or prior period adjustments) depending on the circumstances. Therefore, the best answer is D, as it includes all of the possible choices.

Question 20

Which one of the following types of losses is excluded from the determination of net income in income statements?
A)Material losses resulting from transactions in the company's investments account.
B)Material losses resulting from unusual sales of assets not acquired for resale.
C)Material losses resulting from the write-off of intangibles.
D)Material losses resulting from correction of errors related to prior periods.

Accepted Answer

Material losses resulting from correction of errors related to prior periods are excluded from the determination of net income in income statements because they are treated as prior period adjustments, not as part of the current period's income or expenses. These adjustments are directly applied to retained earnings rather than affecting the current period's net income.

Quiz 4: Income Statement and Related Information

An income statement shows "income before income taxes and extraordinary items" in the amount of $2,055,000.The income taxes payable for the year are $1,080,000, including $360,000 that is applicable to an extraordinary gain.Thus, the "income before extraordinary items" is

When a company discontinues an operation and disposes of the discontinued operation (component) , the transaction should be included in the income statement as a gain or loss on disposal reported as

The approach most companies use to provide information related to the components of other comprehensive income is a

Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business?

A correction of an error in prior periods' income will be reported $\begin{array} { l l c } & \text { In the income statement } & \text { Net of tax } \\\hline \end{array}$

Fleming Company has the following items: write-down of inventories, $240,000; loss on disposal of Sports Division, $370,000; and loss due to an expropriation, $226,000.Ignoring income taxes, what total amount should Fleming Company report as extraordinary losses?

Which of the following is true about intraperiod tax allocation?

Comprehensive income includes all of the following except

Earnings per share should always be shown separately for

If plant assets of a manufacturing company are sold at a gain of $820,000 less related taxes of $250,000, and the gain is not considered unusual or infrequent, the income statement for the period would disclose these effects as

Which of the following items will not appear in the retained earnings statement?

A material item which is unusual in nature or infrequent in occurrence, but not both should be shown in the income statement $\begin{array}{cc}&\text { Net of Tax } & \text { Disclosed Separately } \\\hline \end{array}$

Gross billings for merchandise sold by Otto Company to its customers last year amounted to $15,720,000; sales returns and allowances were $370,000, sales discounts were $175,000, and freight-out was $140,000.Net sales last year for Otto Company were

Sam Hurd Company has the following items: write-down of inventories, $120,000; loss on disposal of Sports Division, $185,000; and loss due to strike, $113,000.Ignoring income taxes, what total amount should Sam Hurd Company report as extraordinary losses?

Income taxes are allocated to

Which one of the following types of losses is excluded from the determination of net income in income statements?