Question 1

Corporate income statements must be prepared in multistep form.

Accepted Answer

Corporate income statements can be prepared in either single-step or multistep form, depending on the company's preference and reporting requirements.

Question 2

Non-operating items will generally reduce a company's quality of earnings.

Accepted Answer

Non-operating items are items that do not directly relate to a company's core operations, such as gains or losses from the sale of assets, interest income, or extraordinary expenses. These items can potentially skew a company's earnings and make it difficult to evaluate the true performance of its operations. Therefore, non-operating items are generally considered to reduce a company's quality of earnings.

Question 3

Discontinued operations are considered non-operating items.

Accepted Answer

Discontinued operations are considered non-operating items because they are not part of a company's ongoing and regular business activities. They represent the disposal of a significant component of a company's operations or a business segment that has been discontinued. As such, they are typically reported separately on the income statement after continuing operations.

Question 4

Write-downs and restructurings are often an indication of bad management decisions in the past.

Accepted Answer

Write-downs and restructurings are usually a result of poor performance or mismanagement in the past, such as ineffective cost management, poor strategic decisions, or failing to adapt to changing market conditions. Therefore, they are often seen as an indication of bad management decisions.

Question 5

"Big baths" commonly occur when a company is having a good year.

Accepted Answer

"Big baths" typically occur when a company is having a bad year and wants to write off large amounts of losses in order to make future earnings look better. It is not common for companies to take big baths during a good year.

Question 6

Income tax allocation procedures are applied to comply with the matching principle.

Accepted Answer

Income tax allocation procedures are applied to comply with the matching principle, which states that expenses should be matched with the revenue they help generate in the same accounting period.

Question 7

A write-down is another term for a restructuring.

Accepted Answer

A write-down refers to the reduction in the value of an asset on the balance sheet, while a restructuring involves significant changes in the organization's structure, operations, or finances to improve performance or address financial difficulties. While a write-down may be a component of a restructuring, a write-down does not necessarily indicate a restructuring is taking place.

Question 8

The quality of a company's earnings is affected by the accounting estimates chosen by the company's management.

Accepted Answer

Accounting estimates, such as depreciation, impairments, and provisions for doubtful debts, can have a significant impact on a company's financial performance and the quality of its earnings. As such, the choice of accounting estimates by the management can affect the accuracy and reliability of the company's financial statements and the perception of investors and stakeholders about the company's financial health.

Question 9

A corporation's actual income taxes payable is computed in accordance with generally accepted accounting principles.

Accepted Answer

Actual income taxes payable are computed based on tax laws and regulations, not generally accepted accounting principles (GAAP). GAAP is used for financial reporting purposes.

Question 10

An analysis of the nature of nonoperating items is important in judging the quality of the net income figure.

Accepted Answer

Nonoperating items are items that are not related to the core operations of the business, such as gains/losses from the sale of assets, interest income or expenses, and one-time charges or gains. These items can distort the overall net income figure, making it important to analyze and understand their nature in order to accurately judge the quality of the net income figure. Therefore, the statement is true.

Question 11

In general, an accounting method or estimate that results in a higher current earnings produces a better quality of operating income.

Accepted Answer

A higher current earnings resulting from a favorable accounting method or estimate may not necessarily indicate a better quality of operating income. It could be a temporary boost in earnings that does not reflect the company's true operating performance, and could mislead investors and stakeholders. A better quality of operating income is one that accurately reflects the company's sustainable operating performance over time.

Question 12

A company with a high quality of earnings is one that has earned a substantial profit for the period.

Accepted Answer

A high quality of earnings refers to the sustainability and reliability of earnings, not just the amount. It indicates that the earnings are derived from the company's core operations and are not significantly influenced by accounting adjustments or non-recurring items.

Question 13

If the amount of income taxes expense exceeds the amount of actual income taxes payable for a year, the difference is recorded by a debit to a balance sheet account called Deferred Income Taxes.

Accepted Answer

The answer of If the amount of income taxes expense...

Question 14

The only possible change in the Deferred Income Taxes account balance for a period is due to the difference between the amount of income taxes expense for that period and the amount of income taxes actually payable to the IRS for the period.

Accepted Answer

The statement is incorrect. The Deferred Income Taxes account balance can also change due to changes in tax laws, changes in tax rates, and changes in the timing of income recognition or expense recognition.

Question 15

The quality of earnings is an indication of the sustainability of earnings into future accounting periods.

Accepted Answer

The statement is true. The quality of earnings refers to the degree to which earnings accurately reflect the economic performance of a company and are likely to continue into the future. Investors and analysts examine a company's financial statements, including its income statement, balance sheet, and cash flow statement, to assess the quality of earnings. Companies with high-quality earnings are more likely to maintain or increase their earnings over time, while those with low-quality earnings may struggle to do so.

Question 16

Extraordinary gains and losses are a component of income from operations.

Accepted Answer

Extraordinary gains and losses are not part of income from operations; they are reported separately on the income statement as they are unusual and infrequent events.

Question 17

Both restructurings and write-downs reduce current operating income.

Accepted Answer

Both restructurings and write-downs result in expenses that decrease current operating income. Restructurings involve one-time costs like severance payments, while write-downs involve a reduction in the value of assets on the books. Both impact the bottom line of the company's financial statements.

Question 18

The write-off of goodwill that has been impaired is a component of income from operations.

Accepted Answer

The write-off of goodwill that has been impaired is typically reported as a separate line item below income from operations, often under "other expenses" or "non-operating expenses."

Question 19

The amount of income taxes expense appearing on a corporation's income statement must be calculated in accordance with the matching principle.

Accepted Answer

The matching principle requires that expenses be matched with revenues in the period in which they were incurred, regardless of when payment is made. This means that income taxes expense must be recorded in the period to which they relate, based on the amount of taxable income earned during that period. Therefore, the amount of income taxes expense appearing on a corporation's income statement must be calculated in accordance with the matching principle.

Question 20

A gain on the sale of an asset is a component of income from operations.

Accepted Answer

A gain on the sale of an asset is considered a non-operating item and not a component of income from operations. It is typically reported separately on the income statement after income from operations.

Quiz 14: The Corporate Income Statement and the Statement of Stockholders Equity