Question 1

Revenue can be recognized either when it is earned, collection has occurred, or collection is reasonably certain to occur.

Accepted Answer

False

Question 2

The SEC scrutinizes reported earnings numbers to assess the quality of earnings and to detect any potential for earnings management.

Accepted Answer

The SEC (Securities and Exchange Commission) reviews reported earnings numbers to ensure they are accurate and to identify any instances of earnings management, which involves the manipulation of financial records to present a more favorable picture of a company's financial health than is actually the case.

Question 3

If a company does not have any discontinued operations to list on its income statement, the labels should still be there with a zero balance noted.

Accepted Answer

The labels for discontinued operations are only included on the income statement if a company actually has discontinued operations to report. If there are no discontinued operations, the labels are omitted entirely.

Question 4

A segment must pass all of the tests in order for it to be considered a reportable segment. These tests include the revenue, profit, and asset tests.

Accepted Answer

A segment only needs to pass one of the tests (revenue, profit, or asset tests) to be considered reportable, not all of them.

Question 5

There is no prescribed income statement format under IFRS whereas U.S. GAAP requires the use of the single- step or the multiple-step format.

Accepted Answer

Under IFRS, there is no prescribed format for the income statement, allowing for flexibility in presentation, whereas U.S. GAAP specifically requires either a single-step or multiple-step format.

Question 6

Under U.S. GAAP or IFRS, a company can either report its comprehensive income or loss under present net income and comprehensive income in a single continuous performance statement or report it in a separate but consecutive financial statement.

Accepted Answer

Both U.S. GAAP and IFRS allow a company to present comprehensive income in a single continuous statement of comprehensive income or in two separate but consecutive statements, where the first statement presents components of net income and the second presents components of other comprehensive income.

Question 7

U.S. GAAP and IFRS companies commonly measure and report net income and comprehensive income.

Accepted Answer

Both U.S. GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards) require companies to measure and report net income and comprehensive income, although the specific presentation formats may differ. Net income includes revenues, expenses, gains, and losses that are reflected in the income statement, while comprehensive income includes net income and other comprehensive income (OCI) items that are not recognized in the net income calculation but affect equity, such as foreign currency translation adjustments and unrealized gains or losses on certain types of investments.

Question 8

The most common way in which to prepare the statement of cash flows is the indirect method, which is encouraged by FASB.

Accepted Answer

The indirect method is the most common way to prepare the statement of cash flows, but the FASB encourages the direct method.

Question 9

Systematic and rational allocation is used to recognize revenue.

Accepted Answer

Systematic and rational allocation is typically used for expense recognition, such as depreciation or amortization, not for revenue recognition. Revenue recognition principles dictate that revenue is recognized when it is earned and realizable, following specific criteria outlined in accounting standards.

Question 10

The information contained in the statement of cash flows allows external users to assess a company's risk, liquidity, financial flexibility, and operating capability.

Accepted Answer

The statement of cash flows provides detailed information on a company's cash inflows and outflows from operating, investing, and financing activities, which helps external users evaluate its financial health and operational efficiency.

Question 11

Gains or losses associated with derivative financial instruments would be included in income from continuing operations.

Accepted Answer

The answer of Gains or losses associated with derivative financial...

Question 12

A company does not have to disclose information about the sale of a discontinued component in the notes to its financial statements until the actual sale has occurred.

Accepted Answer

According to accounting standards, a company must disclose information about the sale of a discontinued component, including details about the disposal plan, in the notes to its financial statements as soon as the decision to sell has been made, not only after the actual sale has occurred. This is to ensure transparency and provide stakeholders with relevant information about future changes in the company's operations and financial position.

Question 13

When a company classifies a component as held for sale, it must report the component on its balance sheet at the lower of its book value or its fair value minus costs to sell.

Accepted Answer

This accounting treatment is in accordance with the International Financial Reporting Standards (IFRS 5) and U.S. Generally Accepted Accounting Principles (GAAP), which require that a long-lived asset (or disposal group) classified as held for sale be measured at the lower of its carrying amount or fair value less costs to sell.

Question 14

When a parent company owns a majority of the common shares of a subsidiary company but not 100% of them, the parent company will consolidate all of the subsidiary's revenues and expenses into its financial statements.

Accepted Answer

When a parent company owns more than 50% of a subsidiary's common shares, it has control over the subsidiary, and thus, it consolidates the subsidiary's financial statements with its own, including all revenues and expenses, regardless of the percentage owned beyond the majority stake.

Question 15

To compute earnings per share the denominator is net income attributable to common shareholders less any preferred stock dividends for the period.

Accepted Answer

To compute earnings per share (EPS), the denominator is the weighted average number of common shares outstanding during the period; net income attributable to common shareholders less any preferred stock dividends is the numerator.

Question 16

The amount of money that can be distributed to shareholders as a return of capital, without being a return on capital, is the capital financial concept.

Accepted Answer

The statement confuses the terms. A return of capital reduces the invested capital in the business and is not considered a return on capital, which refers to the profit made on the investment. The concept described seems to mix elements of both without accurately defining a recognized financial concept.

Question 17

Interperiod tax allocation involves apportioning a corporation's total income tax expense for a period to the various components of its net income and other comprehensive income items.

Accepted Answer

The answer of Interperiod tax allocation involves apportioning a corporation's...

Question 18

Together with the cash flow statement, the income statement enables the investors to determine the rate of return the company is generating relative to the amount of capital invested.

Accepted Answer

The statement that enables investors to determine the rate of return relative to the amount of capital invested is the return on investment (ROI) or return on equity (ROE) calculations, which typically involve data from both the income statement and the balance sheet, not the cash flow statement. The cash flow statement is used to assess the liquidity and financial flexibility of the company.

Question 19

Any disposal of a large number of long-lived assets can appropriately be reported in the income statement as results from discontinued operations.

Accepted Answer

Disposal of a large number of long-lived assets is not automatically reported in the income statement as results from discontinued operations. According to accounting standards, for a disposal to be classified under discontinued operations, it must represent a strategic shift that has a major effect on an entity's operations and financial results, such as disposal of a major line of business or a major geographical area of operations.

Question 20

Companies with lower coverage ratios have a greater risk and a lower financial flexibility.

Accepted Answer

A lower coverage ratio indicates that a company has less income to cover its debt and obligations, suggesting higher risk and reduced financial flexibility.

Quiz 5: The Income Statement and the Statement of Cash Flows Time Value of Money Module