Question 1

Which of the following income statement items is considered to be transitory?
A)promotional costs for a new product
B)sales revenue from the general public
C)interest expense on short-term loans
D)income from discontinued operations

Accepted Answer

D

Question 2

Most elements of operating income are permanent in nature.

Accepted Answer

True

Question 3

The "nature approach" to classifying expenses refers to classification by source such as salary costs or rent expense.

Accepted Answer

The nature approach to classifying expenses refers to classification by source or nature of the expense, such as salary costs, rent expense, utility expenses, etc.

Question 4

Which of the following is considered to be a characteristic of the usefulness of income statements?
A)Income statements require judgment.
B)Income statements evaluate past performance.
C)Income statements depend on the accounting methods selected.
D)Income statements exclude unreliable information.

Accepted Answer

Income statements are generally used to evaluate the past performance of a company, particularly in terms of its profitability. While income statements do require judgment and can be affected by the accounting methods selected, they still provide useful information on the financial health of a company based on their historical financial results. Excluding unreliable information is also a useful characteristic, but not unique to income statements.

Question 5

Which of the following is an earnings management technique that involves increasing a current loss to show a future increase in net income?
A)inversion
B)comprehensive counting
C)big bath
D)cookie jar reserves

Accepted Answer

The earnings management technique that involves increasing a current loss to show a future increase in net income is known as "big bath". This approach involves taking large write-downs or write-offs in the current period in order to bring reported earnings down to a lower level. This then allows for future increases in earnings to appear more significant, which can help boost investor confidence and stock prices.

Question 6

The "cookie jar reserves" earnings management technique involves increasing earnings so as to increase managers' compensation.

Accepted Answer

The "cookie jar reserves" technique involves decreasing earnings in good years by setting aside reserves, which can be used to increase earnings in bad years, not directly to increase managers' compensation.

Question 7

Comprehensive income may be reported in the financial statements in either of two formats.

Accepted Answer

Comprehensive income can be reported either in a single statement of comprehensive income or in two separate statements, with the first being the income statement and the second being the statement of other comprehensive income.

Question 8

How does the fact that accounting standards allow managers to exercise their professional judgment when making accounting policy decisions constitute a limitation of the income statement?

Accepted Answer

The answer of How does the fact that accounting standards...

Question 9

Morton Company has the following transactions in the current year.Assuming that all of the transactions are material,which of them will most likely have no effect on current year net income?
A)advance in technology that renders certain inventory items obsolete
B)retirement of callable bonds at a premium
C)sale of used equipment that had been fully depreciated in prior years
D)increase in the fair value of certain available-for-sale securities held as an investment

Accepted Answer

The answer of Morton Company has the following transactions in...

Question 10

Elements of other comprehensive income are primarily permanent in nature.

Accepted Answer

The answer of Elements of other comprehensive income are primarily...

Question 11

Other comprehensive income is comprised of elements explicitly excluded from net income.

Accepted Answer

Other comprehensive income (OCI) includes items that are not included in net income, such as gains or losses from foreign currency translations, unrealized gains or losses on available-for-sale securities, and certain pension adjustments.

Question 12

Each of the following is a motivation to engage in earnings management except ________.
A)beat benchmarks
B)avoid reporting a loss
C)separate other comprehensive income from net income
D)present a smooth,upwards trend in earnings

Accepted Answer

Separating other comprehensive income from net income is not a motivation for earnings management. The other choices listed are all motivations for earnings management.

Question 13

Which of the following income statement items is considered to be permanent?
A)gains on disposal of equipment
B)impairment losses
C)interest expense
D)discontinued operations

Accepted Answer

Interest expense is considered to be a permanent income statement item as it is a recurring expense that is necessary to operate the business. Gains on disposal of equipment, impairment losses, and discontinued operations are all considered to be non-permanent items as they are not part of the company's regular operations and could vary significantly from year to year.

Question 14

In what ways do the accounting standards allow companies to present their report about comprehensive income in the financial statements?

Accepted Answer

The answer of In what ways do the accounting standards...

Question 15

The "cookie jar reserves" earnings management technique involves ________.
A)increasing earnings in the current period in anticipation of significant future decreases
B)decreasing losses in the current period to allow the firm to show increased net income in the future
C)increasing earnings so as to increase managers' compensation
D)increasing losses in the current period to allow the firm to show increased net income in the future

Accepted Answer

The "cookie jar reserves" technique involves increasing losses or setting aside reserves in the current period, which can be reversed in future periods to inflate earnings and show increased net income.

Question 16

The two parts that compose comprehensive income are operating income and net income.

Accepted Answer

Comprehensive income consists of all changes in equity during a period except those resulting from investments by owners and distributions to owners. It includes both net income and other comprehensive income, which is composed of items such as unrealized gains or losses on available-for-sale securities and foreign currency translation adjustments. Operating income is a component of net income, not comprehensive income.

Question 17

The "big bath" earnings management technique involves increasing an expected net loss so as to report an even larger net loss.

Accepted Answer

The answer of The "big bath" earnings management technique involves...

Question 18

Which of the following is considered to be a limitation of income statements?
A)Income statements depend on accounting methods selected.
B)Income statements evaluate past performance.
C)Income statements assess uncertainties of achieving future cash flows.
D)Income statements predict future performance.

Accepted Answer

Income statements depend on accounting methods selected, which may vary between companies and can affect the comparability of the statements. Additionally, income statements evaluate past performance and do not necessarily provide information on the uncertainties of achieving future cash flows or predict future performance.

Question 19

Comprehensive income is comprised of elements explicitly excluded from net income.

Accepted Answer

The answer of Comprehensive income is comprised of elements explicitly...

Question 20

Which of the following statements about earnings quality is false?
A)Earnings quality is enhanced when managers are afforded discretion and judgment in applying accounting standards.
B)Permanent earnings result in higher earnings quality,while transitory earnings result in lower earnings quality.
C)Earnings quality is of considerable interest not only to investors and creditors but also to auditors,regulators,and academics.
D)Earnings quality captures the degree to which reported income provides financial statement users with useful information for predicting future firm performance.

Accepted Answer

The answer of Which of the following statements about earnings...

Quiz 5: Statements of Net Income and Comprehensive Net Income

Which of the following income statement items is considered to be transitory?

Most elements of operating income are permanent in nature.

The "nature approach" to classifying expenses refers to classification by source such as salary costs or rent expense.

Which of the following is considered to be a characteristic of the usefulness of income statements?

Which of the following is an earnings management technique that involves increasing a current loss to show a future increase in net income?

The "cookie jar reserves" earnings management technique involves increasing earnings so as to increase managers' compensation.

Comprehensive income may be reported in the financial statements in either of two formats.

How does the fact that accounting standards allow managers to exercise their professional judgment when making accounting policy decisions constitute a limitation of the income statement?

Morton Company has the following transactions in the current year.Assuming that all of the transactions are material,which of them will most likely have no effect on current year net income?

Elements of other comprehensive income are primarily permanent in nature.

Other comprehensive income is comprised of elements explicitly excluded from net income.

Each of the following is a motivation to engage in earnings management except ________.

Which of the following income statement items is considered to be permanent?

In what ways do the accounting standards allow companies to present their report about comprehensive income in the financial statements?

The "cookie jar reserves" earnings management technique involves ________.

The two parts that compose comprehensive income are operating income and net income.

The "big bath" earnings management technique involves increasing an expected net loss so as to report an even larger net loss.

Which of the following is considered to be a limitation of income statements?

Comprehensive income is comprised of elements explicitly excluded from net income.

Which of the following statements about earnings quality is false?