Deck 5: Income Statement: Reporting Results of Operating Activities

Question 1

Both U.S.GAAP and IFRS require firms to report certain information about each of their operating segments.

Answer 1

True

Question 2

Comprehensive income equals net income as reported on the income statement plus (minus) the increase (decrease) in other comprehensive income for the year.

Answer 2

True

Question 3

Most firms display the components of cost of sales.

Answer 3

False

Question 4

Expenses measure the outflow of net assets consumed in the process of generating revenues.

Question 5

Under the accrual method, the timing of revenue recognition is influenced by when the services or product are provided.

Question 6

U.S.GAAP and IFRS require firms to disclose unrealized gains and losses that historically have bypassed the income statement in a category called other comprehensive income.

Question 7

Cost is the economic sacrifice made to acquire goods or services.

Question 8

The income statement, also called the statement of financial position, provides information, at
a point in time, on the firm's productive resources and the financing used to pay for those
resources.

Question 9

Revenues measure the inflow of net assets from operating activities.

Question 10

Historically, recognition has described a preference for financial reporting such "that possible errors in measurement be in the direction of understatement rather than overstatement of net income and net assets."

Question 11

The income statement typically provides information about the operating results of business segments.

Question 12

Both U.S.GAAP and IFRS require the disclosure, in the notes to the financial statements, of selected information about business segments.

Question 13

Current accounting practice takes the viewpoint of shareholders by reporting the amount of net income available to shareholders after subtracting from revenues all expenses incurred in generating the revenue by claimants (for example, employees, lenders, governments) other than shareholders.

Question 14

Common terminology, but not definitions in U.S.GAAP and IFRS, often refers to the difference between sales and cost of sales as gross margin, gross profit, or gross income.

Question 15

Gains/Losses arise from relatively infrequent transactions, and there can be no assurance that they will recur in any future period.

Question 16

Expenses provide future benefits, and assets measure the consumption of those benefits.

Question 17

The statement of cash flows begin with revenues; for this reason, analysts often refer to revenue growth as "top-line" growth.

Question 18

Expenditures on advertising and research must be recognized as expense in the period of expenditure, regardless of the firm's expectation of future benefits.

Question 19

All transactions that increase net assets affect income.

Question 20

Items classified as operating expenses reflect management's judgment that the item is a cost of the core business.

Question 21

Income statements prepared under U.S.GAAP contain which of the following sections or categories, depending on the nature of a firm's earnings for the period?

A)income from continuing operations
B)income, gains, and losses from discontinued operations
C)extraordinary gains and losses
D)all of the above
E)none of the above

Question 22

There are three formats available for both U.S.GAAP and IFRS reporting of the items that are included in Other Comprehensive Income.

Question 23

Revenue and expense accounts

A)are permanent accounts.
B)are temporary accounts.
C)reflect cumulative changes in each account since the organization of the firm.
D)record all cash receipts and cash disbursements.
E)none of the above

Question 24

Which of the following is/are true?

A)Cost is the economic sacrifice made to acquire goods or services
B)When the good or service acquired has reliably measurable future benefits to a firm, the cost is an asset.
C)When the firm consumes the good or service, the cost is an expense.
D)All of the above are true.
E)None of the above are true.

Question 25

The _____ convention, links the timing of some expenses with revenue recognition.

A)going concern
B)conservatism
C)matching
D)materiality
E)objectivity

Question 26

Income statements contain which of the following sections or categories, depending on the nature of a firm's earnings for the period?

A)income from continuing operations
B)income, gains, and losses from discontinued operations
C)extraordinary gains and losses
D)all of the above
E)none of the above

Question 27

Which of the following is/are false?

A)Firms do not necessarily recognize revenues when they receive cash
B)Firms do not necessarily recognize expenses when they disburse cash.
C)Net income will not necessarily equal cash flow from operations each period.
D)A profitable firm will likely borrow funds in order to remain in business, but eventually operations must generate cash to repay the borrowing.
E)None of the above are false

Question 28

U.S.GAAP and IFRS require firms in some instances to change the carrying value of certain
assets and liabilities.Both sets of accounting standards preclude the recognition of these
changes in net income, and therefore in retained earnings.

Question 29

U.S.GAAP and IFRS distinguish between revenues and expenses on the one hand and gains and losses on the other.Which of the following is/are true?

A)Revenues and expenses result from the recurring, primary operating activities of a business.
B)Income items include the ordinary, recurring operating activities of the firm.
C)Gains and losses result from either peripheral activities or nonrecurring activities.
D)The reporting of revenues and expenses are at gross amounts, and firms report gains and losses at net amounts.
E)all of the above

Question 30

Which of the following concepts best characterizes the accrual basis of accounting?

A)Conservatism
B)Matching
C)Understandability
D)Going concern
E)Unit of measurement

Question 31

_____ arise from relatively infrequent transactions, and there can be no assurance that they will recur in any future period.

A)Gains/Losses
B)Revenues
C)Expenses
D)Assets
E)Liabilities

Question 32

Which of the following is/are true?

A)Revenues measure the inflow of net assets from operating activities.
B)Expenses measure the outflow of net assets consumed in the process of generating revenues.
C)Recognizing revenues and expenses always involves a simultaneous entry in an asset and/or liability account.
D)Adjusting entries almost always involve an entry in at least one income statement and one balance sheet account.
E)All of the above are true.

Question 33

The firm recognizes an expense when the following condition(s) hold(s).

A)The consumption of the asset results from a transaction that leads to the recognition of revenue.
B)The consumption of the asset results from the passage of time.
C)The expenditures on advertising must be recognized as expense in the period of expenditure.
D)The expenditures on research must be recognized as expense in the period of expenditure.
E)all of the above

Question 34

U.S.GAAP and IFRS distinguish between revenues and expenses on the one hand and gains and losses on the other.Which of the following is/are not true?

A)Revenues and expenses result from the recurring, primary operating activities of a business.
B)Income items include the ordinary, recurring operating activities of the firm.
C)Gains and losses result from either peripheral activities or nonrecurring activities.
D)The reporting of revenues and expenses are at gross amounts, and firms report gains and losses at net amounts.
E)Gains and losses result from the recurring, primary operating activities of a business.

Question 35

_____ reflect the decrease in shareholders' equity resulting from the decrease in the net assets consumed during the generation of income.

A)Revenues
B)Expenses
C)Dividends
D)Liabilities
E)Common stock

Question 36

The matching convention assigns _____ to the related _____.

A)expenses; revenues
B)revenues; revenues
C)assets; liabilities
D)liabilities; assets
E)assets; shareholders' equity

Question 37

A seller of goods can easily associate (or match) the consumption of the benefits of the asset sold with revenues from its sale.At the time of sale and revenue recognition, the seller

A)removes the asset (inventory) from the seller's balance sheet.
B)recognizes revenue.
C)recognizes a reduction in an asset (inventory).
D)records the cost of goods sold expense in the same amount by which inventory decreases.
E)all of the above

Question 38

What criteria must sales transactions meet in order for the seller to recognize revenues before collecting cash?

A)The revenues must be earned (the firm must have achieved substantial performance).
B)The amount to be received must qualify as an asset (there must be a future economic benefit and the amount must be measured with sufficient reliability).
C)The firm must have a reasonable expectation that it will collect the amount owed from the customer.
D)all of the above
E)none of the above

Question 39

When assets and income from operations that a firm has decided to discontinue (and dispose of or abandon), separating the two income components allows users to form better predictions of

A)past earnings.
B)current earnings.
C)future earnings.
D)all of the above
E)none of the above

Question 40

Income statements prepared under IFRS contain which of the following sections or categories, depending on the nature of a firm's earnings for the period?

A)income from continuing operations
B)income, gains, and losses from discontinued operations
C)separate disclosure of material income items
D)all of the above
E)none of the above

Question 41

A manufacturing firm has manufacturing costs which become product costs. These manufacturing costs do not include:

A)direct material costs (or raw material costs)
B)direct labor costs
C)manufacturing overhead costs (sometimes called indirect manufacturing costs)
D)expenditures for administrative staff
E)expenditures for supervisors' salaries, factory utilities, property taxes, insurance, and depreciation on manufacturing plant and equipment

Question 42

A firm sells its headquarters building at a gain. This means that at the time of sale

A)the cash or other assets received were greater than the building's book value.
B)the cash or assets received in a transaction were less than the carrying value of the assets given up.
C)the cash or other assets received were greater than the building' carrying value.
D)the cash or assets received in a transaction were less than the building's book value.
E)both choices a and c are correct.

Question 43

Subtracting nonoperating expenses from operating income yields:

A)income tax expense
B)profit before income taxes
C)net income
D)gross profit
E)none of the above

Question 44

Under the accrual method, the timing of revenue recognition is influenced by

A)where the purchaser gets funds to pay the seller.
B)whether the buyer pays with cash or a promise.
C)when the services or product are provided.
D)when the seller has received a form of payment in settlement of a purchaser's promise.
E)the nature of the services or product provided.

Question 45

Which of the following is/are not true?

A)Net income or profit for a period is the difference between revenues from selling goods and services and the expenses incurred to generate those revenues, plus some gains or losses of the period.
B)If the expenses plus losses exceed the revenues plus gains, the result is a net loss.
C)U.S.GAAP and IFRS require the accrual basis of accounting, which detaches the recognition of revenue from the receipt of cash.
D)A seller recognizes revenues when it has performed all, or nearly all, of its obligations to the customer and when it has received cash or an asset that is convertible to cash.
E)The firm recognizes and reports expenses that have a causal link with revenues, such as cost of sales, in the next accounting period.

Question 46

U.S.GAAP and IFRS require separate income statement display of income from continuing operations and _____earnings that will not continue because the firm either sold, or made a decision to sell, a portion of its business).Such a requirement aids users of the income statement in predicting future earnings.

A)income from discontinued operations
B)extraordinary items
C)changes in accounting principles
D)sale of individual assets
E)none of the above

Question 47

Which of the following is/are true?

A)After cost of sales, the income statement typically shows deductions for other expenses associated with operations (other operating expenses).
B)Many firms present a subtotal called operating income or operating profit, the difference between revenues and expenses associated with core operating activities.
C)two common types of operating expenses are selling, general, and administrative expenses (SG&A) and research and development expenses (R&D).
D)all of the above
E)none of the above

Question 48

Which of the following is/are not a period expense?

A)administrative expenditures
B)expenditures on advertising
C)rent on a warehouse for the current month
D)cost of goods sold
E)all of the above are period expenses

Question 49

Which of the following is/are not examples of a period expense?

A) the president's salary
B) accounting and information systems costs
C) accounting and information systems costs
D)support activity costs such as legal services, employee training, and corporate planning.
E)the factory foreman's salary

Question 50

Revenue recognition is among the most complex issues in financial reporting. The quantity and complexity of the authoritative guidance for recognizing revenues result(s) from

A)misreporting of revenues.
B)reporting revenues before the firm earns them.
C)reporting nonexistent revenues.
D)firms bundling products and services and selling them in multiple-element arrangements.
E)all of the above.

Question 51

The income statement is not also called the statement of

A)operations.
B)operating activity.
C)profit and loss.
D)receipts and disbursements.
E)All of the above are different names assigned to the income statement.

Question 52

A firms decision to sell its headquarters building at a gain

A)would increase income in the year of sale.
B)is not part of the core business.
C)would be aggregated with other noncore, nonoperating items.
D)reported below operating income, probably as Other Income.
E)all of the above

Question 53

_____ present an ordered list, grouped by broad categories of revenues and expenses.They begin with revenues followed by a list of expenses.

A)Income Statement
B)Balance Sheets
C)Statement of Retained Earnings
D)Statement of Cash Flows
E)None of the above

Question 54

As a general principle, under the accrual basis of accounting, the firm recognizes revenue when the transaction meets which of the following conditions?

A)completion of the earnings process, only
B)receipt of assets from the customer, only
C)completion of the earnings process and receipt of assets from the customer
D)expiration of the warranty period, only
E)receipt of the final payment, only

Question 55

Common terminology, but not definitions in U.S.GAAP and IFRS, often refers to the difference between sales and cost of sales as gross

A)sales.
B)profit.
C)operations.
D)all of the above
E)none of the above

Question 56

Which of the following is/are true?

A)Interpreting the income statement involves studying the relations among revenues, expenses, and net income both over time and across firms.
B)Comparisons are likely more valid for the same firm over time than across firms because of the difficulty in identifying truly similar firms.
C)In evaluating over-time performance of a given firm, the user must understand both current economic conditions and how those conditions may have changed over the period of analysis.
D)In evaluating across-firm performance, the user should control for the underlying business model by selecting peer firms that are similar, economically, to the firm being analyzed.
E)All of the above are true.

Question 57

Which of the following is/are not a period expense?

A)salaries and commissions of the sales staff
B)costs to produce catalogs
C)marketing costs, such as advertising
D)costs to produce sales literature
E)direct labor

Question 58

Which of the following is/are true?

A)The seller measures revenue as the amount of cash, or the cash-equivalent value of other assets, that it receives from customers.
B)The seller measures revenue amounts as the exchange price between buyer and seller at the time of sale.
C)If the firm has not performed all of its obligations, it may make adjustments in the form of sales discounts and allowances.
D)If the firm has not performed all of its obligations, it may make adjustments in the form of sales returns.
E)all of the above are true

Question 59

Other (nonoperating) items follow operating expenses or the subtotal for operating profit.Most firms reporting under U.S.GAAP separately report financing costs, such as

A)principal payments.
B)interest revenue.
C)interest expense.
D)principal receipts.
E)none of the above

Question 60

Subtraction of total operating expenses from sales yields:

A)net income.
B)gross margin.
C)operating profit.
D)all of the above
E)none of the above

Question 61

Which of the following is/are not true concerning accumulated other comprehensive income?

A)Firms measure marketable equity securities classified as available for sale at fair value and record the unrealized changes in fair value as an element of other comprehensive income.
B)Firms remeasure derivatives designated as cash flow hedges to fair value at the end of each period and report the unrealized gain or loss in other comprehensive income.
C)Firms translate the reported results of their foreign operations from local currencies into U.S.dollars in order to prepare consolidated financial statements.
D)Firms must include gains and losses from changes in actuarial assumptions, actuarial performance, and prior service cost in other comprehensive income prior to their amortization as an adjustment to pension expense.
E)none of the above

Question 62

Income from continuing operations includes

A)gain on the sales of used equipment that is replaced in the current year.
B)loss from a discontinued operation.
C)loss from an earthquake.
D)gain on a change in accounting principle.
E)loss resulting from prohibitions under new regulations.

Question 63

The _____ uses only sales revenues and net income and an analyst nearly always can calculate, regardless of format and display differences in income statement presentations.

A)acid test or quick ratio
B)current ratio
C)asset turnover ratio
D)profit margin percentage
E)revenue turnover ratio

Question 64

Which financial statement reports operating performance for a specific period of time?

A)Balance sheet
B)Income statement
C)Statement of changes in shareholders' equity
D)Statement of retained earnings
E)Statement of Cash Flows

Question 65

The sum of net income and other comprehensive income is/are:

A)Comprehensive Net Income
B)Comprehensive Income
C)Comprehensive Retained Earnings
D)Net Income after comprehensive income items
E)none of the above

Question 66

Which of the following most likely would be considered a discontinued operation?

A)Production or marketing functions are shifted from one location to another.
B)A sporting goods manufacturer has a bicycle division that meets FASB's definition of a component of the entity and decides to outsource the manufacture of its bicycles.
C)The unprofitable brands of a beauty products component of an entity that manufactures and sells consumer products are discontinued.
D)An entity that is a franchiser in the quick-service restaurant business also operates company-owned restaurants that are unprofitable in a certain region and, as a result, the entity decides to exit both the quick-service business as well as the company-owned restaurants in that region.
E)None of these answer choices is correct.

Question 67

Which of the following is/are true concerning accumulated other comprehensive income?

A)Firms measure marketable equity securities classified as available for sale at fair value and record the unrealized changes in fair value as an element of other comprehensive income.
B)Firms remeasure derivatives designated as cash flow hedges to fair value at the end of each period and report the unrealized gain or loss in other comprehensive income.
C)Firms translate the reported results of their foreign operations from local currencies into U.S.dollars in order to prepare consolidated financial statements.
D)Firms must include gains and losses from changes in actuarial assumptions, actuarial performance, and prior service cost in other comprehensive income prior to their amortization as an adjustment to pension expense.
E)all of the above

Question 68

Recognition of revenue usually occurs when

A)the firm pays for the related expenses.
B)the revenue is earned, such as at the time of the sale or delivery of the goods.
C)a signed, legally binding contract is received.
D)an advance payment for the goods is received.
E)none of the above.

Question 69

The income statement provides information for assessing the operating profitability of a firm.One tool used for analysis is the common-size income statement that expresses

A)each expense and net income as a percentage of revenues.
B)each revenue and net income as a percentage of expenses.
C)each expense and net income as a percentage of total assets.
D)each expense and net income as a percentage of shareholders' equity.
E)each revenue and net income as a percentage of shareholders' equity.

Question 70

Which of the following is/are correct?

A)Discontinued operations are shown as the last category after income from continuing operations.
B)The discontinued operations section of the income statement consists only of the gain or loss on disposal of the discontinued component net of the tax effect.
C)The discontinued operations section of the income statement consists only of the income or loss from operating the discontinued component net of the tax effect.
D)The discontinued operations section of the income statement consists of the income or loss from operating the discontinued component net of the tax effect as well as the gain or loss on disposal of the discontinued component net of the tax effect.
E)None of these answer choices is correct.

Question 71

Firms have considerable flexibility as to how they report other comprehensive income each period.Under U.S.GAAP, they can include

A)it with net income in a single statement of comprehensive income.
B)it in a separate statement of other comprehensive income that is one of the notes to the financial statements.
C)it in a statement of changes in shareholders' equity.
D)all of the above.
E)none of the above.

Question 72

Other comprehensive income for a reporting period include(s)

A)changes in the fair value of marketable equity securities available for sale.
B)changes in the fair value of derivatives used as cash flow hedges.
C)gains and losses related to retirement plans not yet recognized in measuring retirement benefits expense.
D)all of the above
E)none of the above

Question 73

Under accrual accounting, revenues are recognized when

A)the firm has performed all, or most of, the services it expects to provide.
B)the firm has received cash, or some other asset such as a receivable, whose cash-equivalent value it can measure with reasonable precision.
C)the firm has significant uncertainty about the amount and timing of the cash inflows and outflows from the sales transaction.
D)both a and b must be present.
E)none of the above.

Question 74

Both U.S.GAAP and IFRS require firms to report the cumulative effect of other comprehensive income in a balance sheet account called Accumulated

A)Comprehensive Income.
B)Net Comprehensive Income.
C)Other Comprehensive Income.
D)Comprehensive Net Income.
E)None of the above.

Question 75

Over sufficiently long time periods, the amount of net income equals

A)cash inflows minus cash outflows from operating activities.
B)cash inflows minus cash outflows from operating and investing activities.
C)cash inflows minus cash outflows from operating, investing, and debt servicing activities.
D)cash inflows minus cash outflows from operating and debt servicing activities.
E)cash inflows minus cash outflows from investing and debt servicing activities.

Question 76

Shareholders of Forest Glen Corporation have received $35,000 in dividends in the current year.At year end the corporation has total assets of $500,000, total liabilities equal to $300,000, and contributed capital totaling $100,000.If retained earnings at the beginning of the year was $80,000, what was Forest Glen's net income for the current year?

A)$80,000
B)$215,000
C)$55,000
D)$10,000
E)$45,000

Question 77

Both U.S.GAAP and IFRS require the presentation of an income statement and the presentation of the items of Other Comprehensive Income.U.S.GAAP permits the following reporting format(s) except for:

A)a single statement of comprehensive income that shows all the changes in net assets except from transactions with owners.
B)a two-statement presentation that includes an income statement and a separate statement of comprehensive income.
C)a separate display of the items comprising Other Comprehensive Income within a statement of changes in shareholders' equity.
D)a separate display of the items comprising Other Comprehensive Income within a statement of retained earnings.
E)All of the above are acceptable reporting formats.

Question 78

Which of the following statements regarding discontinued operations is true?

A)The assets and liabilities of a disposal group classified as held for sale by an entity may be offset and shown as a single item on the balance sheet of the entity.
B)The assets and liabilities of a disposal group of an entity must be shown separately in the asset and liabilities sections of the balance sheet of the entity and cannot be offset.
C)An adjustment in a subsequent period to the selling price of a component of an entity sold must be reported as a retroactive adjustment in the prior-period financial statements of the entity in which the discontinued operation was reported.
D)The gain or loss on disposal of a component of an entity classified as a discontinued operation need not be disclosed separately from the loss from operations of the discontinued segment.
E)None of these answers is correct.

Question 79

Revenue recognition is among the most complex issues in financial reporting. The quantity and complexity of the authoritative guidance for recognizing revenues result(s) from

A)misreporting of revenues,
B)reporting revenues before the firm earns them,
C)reporting nonexistent revenues,
D)firms bundling products and services and selling them in multiple-element arrangements,
E)all of the above

Question 80

While no general principle describes the nature of items excluded from net income and included in Other Comprehensive Income, they tend to arise from remeasurements of assets and liabilities (often, remeasurements at fair value) and not from transactions.For example, IFRS permits but does not require firms to revalue certain noncurrent assets upward to reflect increases in fair value in excess of acquisition cost.Under IFRS, such a revaluation remeasurement increases assets (because the firm now records an existing asset on the balance sheet at a larger number) and increases Other Comprehensive Income.These increases are accumulated in a(n) _____ account, Revaluation Surplus.

A)liability
B)shareholders' equity
C)revenue
D)asset
E)expense