Deck 4: Reporting Financial Performance

Question 1

Which of the following is INCORRECT regarding "quality of earnings"?

A)Quality of earnings refers to how solid the earnings numbers are.
B)Analysts use quality of earnings to assess how well the reported income reflects the underlying business and future potential.
C)If earnings quality is high, numbers are accepted as is.
D)If earnings quality is low, numbers are accepted as is.

Answer 1

D

Question 2

The view of income that IFRS generally supports is referred to as the

A)all-inclusive approach.
B)current operating performance approach.
C)other comprehensive income approach.
D)operating income approach.

Answer 2

A

Question 3

The "risk/return" trade-off means

A)using various techniques to manage risks.
B)the market demands a greater return when there is greater risk.
C)not investing in a risky business.
D)monitoring risks.

Answer 3

B

Question 4

Comprehensive income includes all changes in equity during a period EXCEPT

A)gains and losses from discontinued operations.
B)unrealized gains and losses on available for sale securities.
C)those resulting from investments by owners and distributions to owners.
D)gains and losses from irregular items.

Question 5

A useful statement of income

A)has feedback value.
B)has predictive value.
C)helps stakeholders understand the business.
D)all of the above

Question 6

All-inclusive income includes all of the following EXCEPT

A)investments by owners.
B)losses on disposal of assets.
C)dividend revenue.
D)gains on the expropriation of property by the government.

Question 7

Which of the following statements regarding high-quality earnings is NOT true?

A)The shares of companies with high-quality earnings are valued higher in capital markets.
B)High-quality earnings make verifiable promises about future performance.
C)High-quality earnings provide higher quality information.
D)High-quality earnings have a lower likelihood of potential misstatement.

Question 8

Value creation refers to

A)generating the highest profits possible given available resources.
B)choosing the optimal business model for a given industry.
C)finding an optimal balance between managing risks and taking the right opportunities.
D)how a company creates value for its employees.

Question 9

The business model may be broken down into three activities:

A)investing, operating, allocating.
B)investing, operating, financing.
C)financing, operating, and comprehensive income.
D)balance sheet, income statement, cash flow statement.

Question 10

Limitations of the income statement include all of the following EXCEPT

A)items that cannot be measured reliably are not reported.
B)only actual amounts are reported in determining net income.
C)income measurement involves the use of estimates.
D)income numbers are affected by the accounting methods used.

Question 11

The income statement captures an entity's

A)financing activities.
B)investing activities.
C)operating activities.
D)interrelationship between activities.

Question 12

Earnings management is

A)the process of managing a business.
B)the process of profit maximization.
C)always fraudulent.
D)manipulating income to meet a targeted earnings level.

Question 13

The concept of representational faithfulness requires that the financial statements

A)reflect the economic reality of running a business.
B)reflect everything no matter how small.
C)reflect the biases of management.
D)identify all risks that the entity faces.

Question 14

At year end, other comprehensive income is closed out to

A)retained earnings.
B)share capital.
C)accumulated other comprehensive income.
D)net income.

Question 15

Segregating a company's recurring operating income from nonrecurring income sources is useful because

A)recurring income is constantly changing.
B)nonrecurring income is subject to greater management bias and uncertainty.
C)results from continuing operations have greater significance for predicting future performance.
D)nonrecurring income is irrelevant to stakeholders.

Question 16

The concept of 'soft numbers' reflects the fact that

A)financial statement numbers may be manipulated.
B)sometimes significant measurement uncertainty exists.
C)sometimes significant errors exist.
D)earnings numbers may not be sustainable.

Question 17

The first step in the financial risk management process is

A)buying insurance.
B)identifying risks.
C)managing risks.
D)monitoring risks.

Question 18

Information in the income statement does NOT help users to

A)evaluate the past performance of the enterprise.
B)provide a basis for predicting future performance.
C)help assess the risk of not achieving future cash flows.
D)calculate the exact amount of future dividends.

Question 19

Net income represents

A)revenues and gains less expenses and losses from continuing operations only.
B)revenues and gains less expenses and losses from both continuing and discontinued operations.
C)net income plus/minus other comprehensive income.
D)ongoing revenues and expenses before gains, losses and discontinued operations.

Question 20

Accumulated other comprehensive income would be reported in

A)shareholders' equity.
B)retained earnings.
C)net income.
D)net income from continuing operations.

Question 21

Regarding presentation of expenses by nature versus function, function refers to

A)the type of expense, such as depreciation, purchases, or employee benefits.
B)whether the expense actively contributed to generation of income.
C)the business activity to which the expense relates.
D)the name of the cost centre responsible for the expense.

Question 22

If an asset is to be classified as held for sale, which of the following conditions does NOT apply?

A)The sale has been authorized by the company's management.
B)Changes to the sale plan are likely.
C)It is probable that the asset will be sold within one year.
D)There is an active program to find a buyer.

Question 23

Sesame Corp.'s adjusted trial balance at December 31, 2017 included the following: Sesame uses the perpetual system, and their income tax rate is 30%.On Sesame's multiple-step income statement for 2017, income from discontinued operations is

A)$10,500.
B)$16,800.
C)$24,000.
D)$24,500.

Question 24

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

A)The gain or loss on disposal should be reported as an unusual item.
B)Results of operations of a discontinued segment should be disclosed immediately below other irregular items.
C)Earnings per share from both continuing operations and net income should be disclosed on the face of the statement or in the notes.
D)The gain or loss on disposal should not be segregated, but should be reported together with the results of continuing operations.

Question 25

Regarding earnings per share (EPS)data

A)both public and private corporations are required to report EPS on the face of the income statement.
B)although public corporations are required to report EPS, private corporations are not.
C)EPS related to comprehensive income is required.
D)financial analysts do not attach much importance to EPS data.

Question 26

The single-step income statement emphasizes

A)the gross profit figure.
B)total revenues and total expenses.
C)discontinued operations and accounting changes.
D)the various components of income from continuing operations.

Question 27

Which of the following is NOT a generally practiced method of presenting the income statement?

A)including corrections of errors made in a prior period
B)the single-step income statement
C)the multiple-step income statement
D)including gains and losses from discontinued operations

Question 28

Use the following information for questions.
Oskar Corp.reports operating expenses in two categories: (1)selling and (2)general and administrative.The adjusted trial balance at December 31, 2017, included the following expense accounts: One-half of the rented premises is occupied by the sales department.
How much of the expenses listed above should be included in Oskar's selling expenses for 2017?

A)$260,000
B)$335,000
C)$340,000
D)$415,000

Question 29

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

A)a prior period adjustment.
B)other comprehensive income.
C)an amount after continuing operations.
D)a bulk sale of plant assets included in income from continuing operations.

Question 30

Intraperiod tax allocation

A)arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return.
B)is required for the cumulative effect of changes in accounting principles but not for discontinued operations.
C)allocates income tax expense evenly over a number of accounting periods.
D)relates income tax expense to the items which affect the amount of tax.

Question 31

When an asset is held for sale

A)it must relate to a discontinued operation.
B)the entity must continue to record depreciation for the asset.
C)the asset is remeasured to the lower of carrying (book)value and fair value less costs to sell.
D)the asset is remeasured to the lower of fair value and carrying (book)value.

Question 32

Use the following information for questions.
Oskar Corp.reports operating expenses in two categories: (1)selling and (2)general and administrative.The adjusted trial balance at December 31, 2017, included the following expense accounts: One-half of the rented premises is occupied by the sales department.
How much of the expenses listed above should be included in Oskar's general and administrative expenses for 2017?

A)$380,000
B)$410,000
C)$440,000
D)$470,000

Question 33

For purposes of discontinued operations, the key elements in determining that a separate segment exists are that the component is

A)a separate business and a separate legal entity.
B)a separate legal entity and generates its own net cash flows.
C)in a separate geographic region and can be sold.
D)a separate business and generates its own cash flow.

Question 34

The calculation of Earnings Per Share is generally based on which income figure?

A)Other Comprehensive Income
B)Income from Discontinued Operations
C)Net Income
D)All-Inclusive Income

Question 35

Intraperiod tax allocation

A)allocates tax balances between fiscal years.
B)allocates tax balances within a fiscal period.
C)is used for income from continuing operations but not for income from discontinued operations.
D)is used for other comprehensive income but not for income from discontinued operations.

Question 36

IFRS requires that expenses be presented in the income statement

A)by amount or in alphabetical order.
B)by geographical area or by the single-step method.
C)by nature or by function.
D)by current or non-current.

Question 37

If the value of an asset that has been written down later increases, to what extent may the related gain be recognized?

A)up to the amount of the original loss
B)the entire amount of the gain may be recognized
C)none of the gain may be recognized
D)up to the fair market value of the related asset

Question 38

Unusual gains and losses are items on the income statement that

A)are typical of everyday activities but do not occur frequently.
B)are not typical of everyday activities or do not occur frequently.
C)include write down of inventories and write off of bad debts.
D)are not usually disclosed separately.

Question 39

When expenses are presented by function in the income statement,

A)they should be presented by type of expense (e.g., depreciation, purchases, salaries).
B)they should be reported as part of other comprehensive income.
C)their cash flow predictive value is increased.
D)more professional judgment is required to allocate expenses between functions.

Question 40

Under IFRS, which of the following is NOT required to be presented separately in the statements of income/comprehensive income?

A)revenues
B)discontinued operations
C)cost of goods sold
D)depreciation/depreciation

Question 41

Which of the following is(are)NOT recommended to be included in notes to the financial statements?

A)accounting policies
B)information about the capital structure of the company
C)individual salaries of top management
D)sources of estimation uncertainty

Question 42

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

A)material losses resulting from correction of errors related to prior periods
B)material losses resulting from sale of assets not originally acquired for resale
C)material losses resulting from write off of intangibles
D)material losses resulting from sale of investments

Question 43

Changes in accounting principle are allowed where

A)they are required by a primary source of GAAP.
B)they result in reliable and more relevant information.
C)the company reports less favourable results under the new policy.
D)both a and b are correct.

Question 44

The statement of changes in shareholders' equity

A)is a required statement under ASPE.
B)is a required statement under IFRS.
C)is a required statement under both IFRS and ASPE.
D)is an optional statement under both IFRS and ASPE.

Question 45

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

A)net loss
B)correction of an error
C)change in accounting estimates
D)stock dividends

Question 46

Groucho Corp.reports operating expenses in two categories: (1)selling and (2)general and administrative.The adjusted trial balance at December 31, 2017 included the following accounts: One-half of the rented premises is occupied by the sales department.Groucho's total selling expenses for 2017 are

A)$520,000.
B)$440,000.
C)$410,000.
D)$350,000.

Question 47

Regarding classification of expenses by nature versus function, under ASPE, an entity is required to

A)present an analysis of expenses based either on their nature or function.
B)present their expenses according to their nature.
C)present expenses in a manner that is most transparent.
D)present their expenses according to their function.

Question 48

Use the following information for questions.
Sesame Corp.'s adjusted trial balance at December 31, 2017 included the following: Sesame uses the perpetual system, and their income tax rate is 30%.
On Sesame's multiple-step income statement for 2017, net income is

A)$9,800.
B)$15,000.
C)$16,800.
D)$24,000.

Question 49

When looking to the statement of financial position for an assessment of earnings quality, stakeholders should pay particular attention to

A)a proportionately high cash balance, as this signifies high-quality earnings.
B)how the company is financed and what the revenue-generating assets are.
C)a proportionately low liability balance, as this signifies high-quality earnings.
D)silly question.The statement of financial position is not a reflection of earnings quality.

Question 50

The following items were among those reported on Ernie Ltd.'s income statement for the year ended December 31, 2017: The office space is used equally by Ernie's sales and accounting departments.What amount should be classified as general and administrative expenses in Ernie's multiple-step income statement for 2017?

A)$117,500
B)$217,500
C)$335,000
D)$465,500

Question 51

Which of the following is a change in accounting principle?

A)a change in the estimated service life of machinery
B)a change from FIFO to weighted average for inventory costing
C)a change in the estimated allowance for bad debts
D)a change in estimated future warranty expense

Question 52

Which of the following should be reported as an adjustment to retained earnings?

Question 53

King Inc.incurred the following infrequent losses during 2017:
A $90,000 write down of equipment leased to others (net of tax)
A $40,000 adjustment of accruals on long-term contracts (net of tax)
A $60,000 write off of obsolete inventory (net of tax)
Of those losses, what amount should be included in King's 2014 income from continuing operations?

A)$190,000
B)$150,000
C)$130,000
D)$100,000

Question 54

The following information is available for Rice Inc.for 2017: Cost of goods sold for 2017 was

A)$650,000.
B)$708,000.
C)$700,000.
D)$736,000.

Question 55

Use the following information for questions.
Sesame Corp.'s adjusted trial balance at December 31, 2017 included the following: Sesame uses the perpetual system, and their income tax rate is 30%.
On Sesame's multiple-step income statement for 2017, income from continuing operations is

A)$17,500.
B)$52,800.
C)$24,500.
D)$26,600.

Question 56

Which of the following is INCORRECT regarding differences between IFRS and ASPE?

A)Both IFRS and ASPE mandate a list of required items that must be presented.
B)IFRS requires that held-for-sale assets be reclassified as current assets.
C)Comprehensive income is not recognized under ASPE.
D)Both IFRS and ASPE require presentation of both basic and diluted EPS.

Question 57

Boardwalk Corporation reports the following information: Boardwalk should report retained earnings at December 31, 2017, as adjusted at

A)$3,140,000.
B)$4,500,000.
C)$5,360,000.
D)$6,220,000.

Question 58

Unsure Inc.made a very large arithmetical error in the preparation of its year-end financial statements by incorrect placement of a decimal point in the calculation of depreciation.The error caused the net income to be reported at almost double the correct amount.When Unsure discovered the error in the following year, correction of the error should be treated as a(n)

A)adjustment to beginning retained earnings, net of tax.
B)increase in depreciation expense for the year in which the error is discovered.
C)gain for the year in which the error was made.
D)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.

Question 59

When reporting a change in accounting principle, required disclosure(s)on the income statement include

A)a per share amount for the cumulative effect of the change.
B)the cumulative effect on prior years, net of tax.
C)the cumulative effect be disclosed immediately after discontinued operations.
D)silly question: a change in accounting principle is not reported on the income statement.

Question 60

To assess the quality of earnings, financial statement users should look at

A)the income statement only.
B)the statement of cash flows.
C)the level of business risk.
D)the whole set of financial statements, including the notes, as well as environmental factors.

Question 61

Use the following information for questions.
Ignore taxes.
Peach Inc.'s financial statements for the years 2017 and 2018 contained errors as follows:
Assuming that none of the errors were detected or corrected, and that no additional errors were made in 2019, by what amount will current assets at December 31, 2018 be overstated or understated?

A)$2,000 overstated
B)$10,000 understated
C)$10,000 overstated
D)$0

Question 62

The following information is available for Pear Limited for 2017: Assuming the company records purchases at gross amounts, the total purchases for 2017 would be

A)$48,200.
B)$61,000.
C)$55,200.
D)$59,800.

Question 63

Papaya Inc.has 100,000 common shares outstanding and has a policy of paying a $1.30 annual dividend for each of these shares.Papaya has an income tax rate of 35%, and its retained earnings statement for 2017 reported a closing balance of $1,452,000.Assuming an opening retained earnings balance of zero, dividend payments according to its usual policy, and no other adjustments, Papaya's 2017 net income was

A)$1,536,500.
B)$2,364,846.
C)$1,452,000.
D)$1,582,000.

Question 64

For the year ended June 30, 2017, Harry Corp.reported revenue of $900,000 in its accrual basis income statement.Additional information was as follows: Under the cash basis, Harry should report revenue of

A)$590,000.
B)$610,000.
C)$630,000.
D)$1,190,000.

Question 65

The modified cash basis

A)is frequently used by manufacturing firms.
B)does not usually record inventory.
C)capitalizes and depreciates property, plant and equipment.
D)is derived from the accrual basis of accounting.

Question 66

Snapsort Corporation reports the following information: Snapsort should report earnings per share of

A)$1.80.
B)$2.16.
C)$2.64.
D)$3.00.

Question 67

Blueberry Inc.reported the following information for 2017: For 2017, on a multiple-step income statement, Blueberry would report other income of

A)$185,000.
B)$73,000.
C)$70,000.
D)$3,000.

Question 68

The following information is available for Mandarin Corp for 2017:
Payment for goods during year $52,000
Cost of goods sold for 2017 is

A)$51,300.
B)$66,000.
C)$52,700.
D)$57,200.

Question 69

During 2017, Honeydew Corp disposed of Blackberry Division, a major segment of its business.Honeydew realized a gain of $1,500,000, net of taxes, on the sale of Blackberry's assets.During 2017, Raspberry's operating losses, net of taxes, were $1,800,000.How should these facts be reported in Honeydew's income statement for 2017?

Question 70

The accrual basis of accounting

A)must be used by all taxpayers.
B)recognizes revenue when earned and expenses when incurred.
C)does not record depreciation.
D)records depreciation but expenses all inventory purchases.

Question 71

Use the following information for questions.
Ignore taxes.
Peach Inc.'s financial statements for the years 2017 and 2018 contained errors as follows:
Assuming that none of the errors were detected or corrected, by what amount will retained earnings at December 31, 2018 be overstated or understated?

A)$4,000 understated
B)$5,000 overstated
C)$8,500 understated
D)$11,500 understated

Question 72

The strict cash basis of accounting

A)records revenue when earned.
B)does not conform with GAAP.
C)records expenses when incurred.
D)none of the above

Question 73

During 2017, Door Inc.decided to dispose of Bell Division, considered a separate reportable segment.Door estimates it can sell Bell at a loss of $30,000, which it does on May 1, 2017.Bell's operating income from January 1, to April 30 was $23,000.Ignoring taxes, and assuming statements are prepared under ASPE, the discontinued operations section of Door's income statement for the year ended December 31, 2017 should report

A)the $23,000 operating income and the $30,000 loss in the discontinued operations section of the income statement.
B)the $23,000 operating income in the body of the income statement and the $30,000 loss in the discontinued operations section of the income statement.
C)the $23,000 operating income and the $30,000 loss in the body of the income statement.
D)only the income from Door's other divisions.Since it no longer owns Bell at December 31, Door does not need to report anything relating to Bell's operations during the year.

Question 74

Gerald Bone, M.D., keeps his accounting records on the cash basis.During 2017, Dr.Bone collected $150,000 from his patients.At December 31, 2016, Dr.Bone had accounts receivable of $45,000.At December 31, 2017, Dr.Bone had accounts receivable of $35,000 and unearned revenue of $5,000.On the accrual basis, how much was Dr.Bone's patient service revenue for 2017?

A)$145,000
B)$140,000
C)$135,000
D)$105,000

Question 75

Regarding presentation of discontinued operations, under IFRS, on the balance sheet, an entity must classify held-for-sale assets as

A)current assets/liabilities.
B)current or non-current, depending on their nature.
C)available for sale assets.
D)silly question: Assets held for sale do not appear on the balance sheet.

Question 76

On January 1, 2017, Apricot Ltd.decided to discontinue its plastics making division.The division, considered a reportable segment, was sold on June 1, 2017.Division assets with a carrying value of $650,000 were sold for $500,000.Operating income from January 1, to May 31, 2017 for the division was $50,000.Ignoring taxes, what amount should be reported on Apricot's income statement for the year ended December 31, 2017, under the caption "discontinued operations"?

A)$200,000 gain
B)$150,000 loss
C)$50,000 gain
D)$100,000 loss

Question 77

Use the following information for questions.
Ignore taxes.
Peach Inc.'s financial statements for the years 2017 and 2018 contained errors as follows:
Assuming that the errors made in 2017 were corrected, but that the errors made in 2018 were not detected, by what amount will 2018 income before taxes be overstated or understated?

A)$5,000 overstated
B)$8,500 overstated
C)$1,500 understated
D)$1,500 overstated

Question 78

The following information is available for Royal Corp for 2017: Assuming that all purchases are made on account, accounts payable at the end of the year are

A)$17,000
B)$22,800
C)$15,800
D)$24,000

Question 79

Compared to the accrual basis of accounting, the cash basis of accounting overstates income by the net increase during the accounting period of the