Question 1

Which of the following statements is TRUE?

Accepted Answer

Restrictions on retained earnings are typically reported in the notes to the financial statements, rather than on the income statement. These restrictions may involve legal requirements, contractual obligations, or other factors that limit the company's ability to distribute earnings to shareholders as dividends. Adjusting journal entries may be required if these restrictions were not properly accounted for in previous periods. The goal of restrictions on retained earnings is not necessarily to maximize dividends paid to shareholders; rather, it is to ensure that the company complies with applicable laws and agreements while managing its finances effectively.

Question 2

Comprehensive income is the company's change in total stockholders' equity from all sources other than its owners, and sometimes includes items not found on the income statement.

Accepted Answer

Comprehensive income includes all changes in equity except those resulting from investments by or distributions to owners. It includes items such as unrealized gains or losses on investments, foreign currency translation adjustments, and certain gains or losses from pension plans. These items may not be reported on the income statement but are included in the comprehensive income statement.

Question 3

Companies usually report their retained earnings restrictions on the balance sheet.

Accepted Answer

Companies usually report their retained earnings restrictions in notes to the financial statements.

Question 4

Certain types of transactions, other than dividend payments, that are NOT included in the income statement, but have an effect on retained earnings would be treated as part of comprehensive income.

Accepted Answer

Certain transactions, such as unrealized gains or losses on investments, foreign currency translation adjustments, and certain pension adjustments are not included in the income statement but affect retained earnings. These items are reported as part of comprehensive income.

Question 5

Which of the following statements is TRUE?

Accepted Answer

Appropriations of retained earnings involve allocating earnings for specific purposes, which is reflected in the financial statements through journal entries. Restrictions on retained earnings, however, are often imposed by external parties (like creditors) or by law, and do not require journal entries because they do not change the allocation of earnings but rather impose limitations on their use.

Question 6

Public companies are required to publish financial statements, but privately held companies are generally not required to do so.

Accepted Answer

This is generally true, although there may be certain reporting requirements for privately held companies in some jurisdictions or in certain circumstances.

Question 7

RT Corp. shows a loss from flooding of $235,000 for the year. Flooding is not uncommon in the area, and so this loss will be included in operating income.

Accepted Answer

The question states that the loss from flooding will be included in operating income, indicating that it is considered an ordinary and recurring expense for the company. Therefore, the loss should be included as part of operating income.

Question 8

The entry to record an appropriation of retained earnings requires a debit to Retained earnings and a credit to Cash.

Accepted Answer

An appropriation of retained earnings involves allocating a portion of retained earnings for a specific purpose, such as paying dividends or investing in a new project. This is typically done through journal entry that includes a debit to retained earnings and a credit to an appropriated earnings account, not cash. The entry would reduce the amount of available retained earnings, but it would not involve an actual cash transaction.

Question 9

The sale or other disposition of a segment of a business is recorded as an extraordinary gain or loss.

Accepted Answer

The sale or other disposition of a segment of a business is not necessarily recorded as an extraordinary gain or loss. It may be part of the regular operations of the business and recorded as a normal gain or loss. The treatment depends on the circumstances of the transaction and the accounting standards applicable to the entity.

Question 10

Which of the following would be a reason for a company to appropriate a portion of retained earnings?

Accepted Answer

Appropriating a portion of retained earnings is a strategy used by companies to retain funds within the business for growth, investment, or other strategic purposes, rather than distributing these funds as dividends to shareholders. This helps ensure that the company has sufficient capital for future projects or expansion plans.

Question 11

Which of the following BEST describes operating income?

Accepted Answer

Operating income is the income or loss generated from the normal operations of the business. It does not include gains or losses from transactions that are not part of the normal operations, income or loss from segments that have been sold or terminated, or income or loss generated from unusual or infrequent events.

Question 12

Which of the following BEST describes restrictions on cash dividends and treasury stock purchases?

Accepted Answer

Restrictions on cash dividends and treasury stock purchases are typically imposed by lenders or creditors to ensure that the company maintains adequate levels of equity. By limiting the amount of cash that can be paid out to shareholders or used to repurchase stock, lenders and creditors can protect their interests and reduce the risk of default. These restrictions are often included in loan covenants and other financing agreements.

Question 13

Which of the following BEST describes the appropriation of retained earnings?

Accepted Answer

Appropriation of retained earnings involves allocating specific amounts of earnings for different purposes such as funding growth and expansion projects, paying dividends or making investments. Choice A is the best description as it specifically mentions earmarking amounts for business purposes. Choice B is also partially correct but focuses only on restricting cash dividends or stock purchases as opposed to allocating funds for specific purposes. Choice C is incorrect as it suggests that all retained earnings are designated for cash dividends rather than being used for other business purposes, and choice D is incorrect as it suggests limiting company transactions to boost earnings, which is not related to appropriation of retained earnings.

Question 14

Which of the following would be a reason for a company to restrict its cash dividends or treasury stock purchases?

Accepted Answer

Lenders or creditors may require a company to maintain a certain level of equity to ensure that the company can fulfill its financial obligations. Restricting cash dividends or treasury stock purchases can help the company meet this requirement. The other options do not typically restrict cash dividends or treasury stock purchases.

Question 15

Comprehensive income is equal to the net income of a company, excluding the effects of discontinued operations and extraordinary items.

Accepted Answer

Comprehensive income includes all changes in equity during a period from non-owner sources, including unrealized gains and losses on available-for-sale securities, foreign currency translation adjustments, and gains or losses from pension plans. It is not equal to net income.

Question 16

Prior period adjustments are shown as an adjustment to the beginning balance of Retained earnings, as reported on the statement of retained earnings.

Accepted Answer

Prior period adjustments are changes made to previously reported financial statements from an error or new information. These adjustments affect the Retained earnings balance, and thus, are shown as an adjustment to the beginning balance of Retained earnings on the statement of retained earnings.

Question 17

Companies are NOT allowed to combine the income statement and the statement of retained earnings, but must show them as two separate reports.

Accepted Answer

Companies are allowed to combine the income statement and the statement of retained earnings into a single statement called the statement of comprehensive income. However, they must still show a separate statement of retained earnings if there are any transactions affecting it.

Question 18

If a company wanted to put a limit on cash dividends to ensure they would have enough retained earnings for a specific project intended to expand and grow the company, the appropriation of a portion of retained earnings would be a good strategy.

Accepted Answer

Appropriating a portion of retained earnings would limit the amount of cash available for dividends, thus allowing the company to allocate more funds towards a specific project intended for growth and expansion. This would help ensure that the company has enough funds to achieve its long-term goals.

Question 19

If a company's lenders wanted to ensure that the company maintained adequate levels of equity to pay back their loans, a good strategy would be to impose restrictions on dividend payments and purchases of treasury stock.

Accepted Answer

Imposing restrictions on dividend payments and purchases of treasury stock would help ensure that the company maintains adequate levels of equity, which in turn would make it more likely that the company can pay back their loans. By limiting dividend payments and treasury stock purchases, the company would retain more of its profits, which can be used to strengthen its financial position and repay the lenders.

Question 20

Gains and losses from the disposal of old plant and equipment are reported as other gains or losses in the multi-step income statement.

Accepted Answer

Gains and losses from the disposal of old plant and equipment are reported as other gains or losses in the multi-step income statement.

Quiz 13: Corporations: Effects on Retained Earnings and the Income Statement

Which of the following statements is TRUE?

Comprehensive income is the company's change in total stockholders' equity from all sources other than its owners, and sometimes includes items not found on the income statement.

Companies usually report their retained earnings restrictions on the balance sheet.

Certain types of transactions, other than dividend payments, that are NOT included in the income statement, but have an effect on retained earnings would be treated as part of comprehensive income.

Which of the following statements is TRUE?

Public companies are required to publish financial statements, but privately held companies are generally not required to do so.

RT Corp. shows a loss from flooding of $235,000 for the year. Flooding is not uncommon in the area, and so this loss will be included in operating income.

The entry to record an appropriation of retained earnings requires a debit to Retained earnings and a credit to Cash.

The sale or other disposition of a segment of a business is recorded as an extraordinary gain or loss.

Which of the following would be a reason for a company to appropriate a portion of retained earnings?

Which of the following BEST describes operating income?

Which of the following BEST describes restrictions on cash dividends and treasury stock purchases?

Which of the following BEST describes the appropriation of retained earnings?

Which of the following would be a reason for a company to restrict its cash dividends or treasury stock purchases?

Comprehensive income is equal to the net income of a company, excluding the effects of discontinued operations and extraordinary items.

Prior period adjustments are shown as an adjustment to the beginning balance of Retained earnings, as reported on the statement of retained earnings.

Companies are NOT allowed to combine the income statement and the statement of retained earnings, but must show them as two separate reports.

If a company wanted to put a limit on cash dividends to ensure they would have enough retained earnings for a specific project intended to expand and grow the company, the appropriation of a portion of retained earnings would be a good strategy.

If a company's lenders wanted to ensure that the company maintained adequate levels of equity to pay back their loans, a good strategy would be to impose restrictions on dividend payments and purchases of treasury stock.

Gains and losses from the disposal of old plant and equipment are reported as other gains or losses in the multi-step income statement.