Question 1

Which of the following statements is true?
A)In stable industries, such as retailers, the gross profit margin is generally volatile from year to year.
B)Gross profit margin and operating profit margin are complements of each other and the two percentages add up to 100%.
C)Fixed costs do not vary proportionately with volume changes but remain the same within a relevant range of activity.
D)In capital intensive industries sales volume changes result in a stable gross profit margin.

Accepted Answer

Fixed costs do not vary proportionately with volume changes but remain the same within a relevant range of activity. The other options are false. The gross profit margin is generally stable in stable industries such as retailers (not volatile), gross profit margin and operating profit margin are not complements of each other, and sales volume changes in capital intensive industries can lead to changes in the gross profit margin.

Question 2

How is earnings per common share calculated?
A)Operating profit divided by the average number of common stock shares outstanding.
B)Net profit divided by the average number of common and preferred stock shares outstanding.
C)Operating profit divided by the average number of repurchased common stock shares.
D)Net profit divided by the average number of common stock shares outstanding.

Accepted Answer

Earnings per common share is calculated by dividing the net profit (or earnings) by the average number of outstanding common stock shares. It gives an indication of how much profit the company is making per share of common stock, and is an important metric for investors to evaluate the company's profitability and potential for future growth.

Question 3

Why is it important to assess operating profit?
A)Operating profit represents the firm's profits after consideration of all revenues, expenses and comprehensive income.
B)The figure for operating profit provides a basis for assessing the success of the firm apart from its financing and investing activities and separate from tax considerations.
C)Operating profit represents the firm's profits after consideration of all revenues and expenses.
D)Operating profit represents the firm's profits after consideration of all revenues and expenses, except for taxes.

Accepted Answer

Operating profit is important to assess because it shows the company's success in generating profits from its core business activities, without considering any financing or investing activities, and without tax considerations. It gives a clear indication of the company's operating efficiency and profitability. Option A includes comprehensive income, which is not necessarily part of operating profit. Option C is a partial definition of operating profit, as taxes are also considered in arriving at the final profit figure. Option D is incorrect as operating profit does include consideration of all revenues and expenses, including taxes.

Question 4

Which of the following is an acceptable method to report total comprehensive income?
A)On the face of the balance sheet.
B)Total comprehensive income does not have to be reported.
C)In the operating section of the cash flow statement.
D)In the statement of stockholders' equity.

Accepted Answer

Total comprehensive income can be reported in the statement of stockholders' equity, which shows changes in equity accounts over a period of time. This statement includes comprehensive income, which is the sum of net income and other comprehensive income items such as unrealized gains or losses on available-for-sale securities or foreign currency translation adjustments. Reporting on the balance sheet or cash flow statement is not appropriate for reporting total comprehensive income.

Question 5

Which item is not a special item that must be disclosed separately on the income statement?
A)Extraordinary gain.
B)Extraordinary loss.
C)Foreign currency translation adjustments.
D)Discontinued operations.

Accepted Answer

Foreign currency translation adjustments are not considered special items that require separate disclosure on the income statement. Extraordinary gains and losses and discontinued operations are specifically noted as items that require separate disclosure.

Question 6

How should companies with more than one revenue source report revenue and cost of goods sold?
A)Each revenue source should be reported separately, but all cost of goods sold should be added together and reported as a single amount.
B)The revenues and cost of goods sold should be netted together and reported as a single line item.
C)All revenue sources should be added together and shown as one line item and all cost of goods sold should be added together and shown as one line item.
D)Each revenue line should be shown separately with a corresponding cost of goods sold line for each revenue source.

Accepted Answer

It is important to provide transparency and clarity in financial reporting, especially for companies with multiple revenue sources. Each revenue line should be reported separately along with its corresponding cost of goods sold line to provide a clear understanding of the company's sources of revenue and associated costs. This approach also facilitates analysis and decision-making by stakeholders such as investors, creditors, and management.

Question 7

Which of the following statements is true?
A)It is unnecessary to analyze operating expenses over which management exercises discretion.
B)Impairment charges do not need to be analyzed since they are generally a non-recurring expense.
C)A good way to improve operating profit is to cut repairs and maintenance costs as much as possible.
D)Operating expenses can be easily analyzed by preparing a common-size income statement.

Accepted Answer

A common-size income statement, which expresses each item as a percentage of sales, simplifies the analysis of operating expenses by allowing for easy comparisons across periods and companies.

Question 8

Use the following information for Jett Co.to answer questions . $\begin{array}{lrr}
&2015&2014\
\text { Sales } & 1,200 & 1,000 \
\text { COGS } & 850 & 700 \
\text { Operating expenses } & 200 & 200 \
\text { Income taxes } & 30 & 35
\end{array}$
-Jett Co.'s gross profit, operating profit and net profit margins for 2015 are:
A)50.0%, 32.5%, 22.5% respectively.
B)29.2%, 12.5%, 10.0%, respectively.
C)27.0%, 11.0%, 10.5%, respectively.
D)21.5%, 17.5%, 12.0%, respectively.

Accepted Answer

The answer of Use the following information for Jett Co.to...

Question 9

What is amortization?
A)The process used to allocate the cost of natural resources.
B)The process used to allocate the cost of tangible fixed assets.
C)The process used to allocate the cost of capital leases, leasehold improvements and intangible assets.
D)The process used to allocate the cost of oil, gas, minerals and standing timber.

Accepted Answer

Amortization is the process of systematically allocating the cost of intangible assets, capital leases, and leasehold improvements over their useful life. Option A refers to depletion, which is used for natural resources like oil, gas, etc. Option B refers to depreciation, which is used for tangible fixed assets like buildings, machinery, etc. Option D is also depletion, but for a specific type of natural resource like standing timber.

Question 10

Selling and administrative expenses include which of the following income statement items?
A)Salaries, insurance, interest.
B)Salaries, rent, advertising.
C)Rent, interest, cost of goods.
D)Advertising, research & development, amortization.

Accepted Answer

Selling and administrative expenses typically include overhead costs such as salaries, rent, and advertising, all of which are included in choice B. Choice A includes insurance and interest, which may be separate line items on the income statement, but are not typically considered part of selling and administrative expenses. Choice C includes rent and interest, but also includes cost of goods, which is not part of selling and administrative expenses. Choice D includes advertising, but also includes research & development and amortization, which are not typically considered part of selling and administrative expenses.

Question 11

Which of the items below would be included under "Other income and expense"?
A)Salaries, interest expense, equity losses.
B)Equity earnings, gains from sale of assets, interest income.
C)Research and development, dividend income, interest expense.
D)Advertising, cost of goods sold, selling and administrative expenses.

Accepted Answer

Other income and expense typically refers to items that are not the primary sources of revenue or expenses for a company. Therefore, options A, C, and D include items that are more closely related to operational expenses and revenue. Option B includes items such as equity earnings and gains from the sale of assets, which can be considered as other income, while interest income can be considered as other income or expense depending on the specifics of the situation.

Question 12

How is a common-size income statement prepared?
A)Each income statement item is expressed as a percentage of total assets.
B)Each income statement item is expressed as a percentage of net sales.
C)Each income statement item is expressed as a percentage of net income.
D)Each income statement item is expressed as a percentage of cash flow.

Accepted Answer

In a common-size income statement, each income statement item is expressed as a percentage of net sales. This allows for easier comparison and analysis of expenses and profitability across different periods or companies.

Question 13

Use the following information for Jett Co.to answer questions . $\begin{array}{lrr}
&2015&2014\
\text { Sales } & 1,200 & 1,000 \
\text { COGS } & 850 & 700 \
\text { Operating expenses } & 200 & 200 \
\text { Income taxes } & 30 & 35
\end{array}$
-Jett Co.'s average tax rates for 2015 and 2014 are:
A)15.5% and 10.0%
B)20.0% and 35.0%
C)25.8% and 35.4%.
D)31.4% and 36.8%.

Accepted Answer

The answer of Use the following information for Jett Co.to...

Question 14

How are sales reported on the income statement?
A)Sales are shown for three years net of returns and allowances.
B)Sales amounts are inflation-adjusted.
C)Sales are shown for two years and are reported in nominal terms.
D)Sales are shown at gross amounts, adjusted for inflation.

Accepted Answer

Sales are reported on the income statement at gross amounts, net of returns and allowances.

Question 15

Which format of the income statement should be used for analysis purposes?
A)Multiple-step.
B)Cash basis.
C)Single-step.
D)Accrual basis.

Accepted Answer

The multiple-step income statement is more useful for analysis purposes because it provides more detail about the company's operations.

Question 16

Which item would not be classified as an operating expense?
A)Interest expense.
B)Rent expense.
C)Depreciation.
D)Repairs and maintenance.

Accepted Answer

Interest expense is a financing expense, not an operating expense. Operating expenses typically include expenses directly related to the day-to-day operation of the business, such as rent, depreciation, and repairs and maintenance.

Question 17

Which of the following items could be found on a statement of shareholders' equity?
A)Reasons for retained earnings increases or decreases.
B)A reconciliation of beginning to ending cash.
C)The market value of the firm's common stock.
D)Assets = Liabilities + Stockholders' Equity.

Accepted Answer

A statement of shareholders' equity typically includes information about retained earnings, including reasons for increases and decreases. Options B and C refer to topics that are not typically found on a statement of shareholders' equity, and option D is the accounting equation, which is not specific to this statement.

Question 18

How does the equity method distort earnings?
A)Income is recognized even though cash may never be received.
B)Equity earnings are recorded even if the investor cannot exercise influence over the investee's policies.
C)Equity earnings are only recorded on a cash basis of accounting.
D)Equity earnings are recorded when investment ownership is 100%.

Accepted Answer

The equity method can distort earnings because it allows an investor to recognize income from an investee even if no cash is received. This can inflate the investor's earnings without an actual increase in cash flow.

Question 19

Which equation represents an income statement?
A)Assets = liabilities + stockholders' equity.
B)Cash in - cash out = net income.
C)Revenues - expenses = net income.
D)Beginning retained earnings + revenues - expenses = ending retained earnings.

Accepted Answer

The equation "Revenues - expenses = net income" represents an income statement, as it shows the revenue earned and expenses incurred during a period of time, with the resulting net income. Option A represents the balance sheet equation, option B is not a complete representation of an income statement, and option D shows the calculation of ending retained earnings, but does not show the full income statement.

Question 20

How is it possible for a U.S.firm to have increasing earnings but a lower effective tax rate?
A)The firm has expenses that are not deductible for tax purposes.
B)Tax rates in foreign countries where the firm operates are higher.
C)Tax rates in foreign countries where the firm operates are lower.
D)It is not possible for a firm to have an effective tax rate different from the U.S.federal statutory tax rate.

Accepted Answer

If a U.S. firm operates in foreign countries where the tax rates are lower than the U.S. federal statutory tax rate, it can have an effective tax rate lower than the statutory rate. This is because the firm can allocate more profits to these low tax rate countries, thereby lowering its overall tax burden. Additionally, the firm may utilize tax incentives and credits to further reduce its effective tax rate. Increasing earnings can also be achieved through various factors such as higher sales revenue, lower expenses, and non-operating income, among others.

Quiz 3: Income Statement and Statement of Stockholders Equity

Which of the following statements is true?

How is earnings per common share calculated?

Why is it important to assess operating profit?

Which of the following is an acceptable method to report total comprehensive income?

Which item is not a special item that must be disclosed separately on the income statement?

How should companies with more than one revenue source report revenue and cost of goods sold?

Which of the following statements is true?

What is amortization?

Selling and administrative expenses include which of the following income statement items?

Which of the items below would be included under "Other income and expense"?

How is a common-size income statement prepared?

Use the following information for Jett Co.to answer questions . $\begin{array}{lrr}&2015&2014\\\text { Sales } & 1,200 & 1,000 \\\text { COGS } & 850 & 700 \\\text { Operating expenses } & 200 & 200 \\\text { Income taxes } & 30 & 35\end{array}$ -Jett Co.'s average tax rates for 2015 and 2014 are:

How are sales reported on the income statement?

Which format of the income statement should be used for analysis purposes?

Which item would not be classified as an operating expense?

Which of the following items could be found on a statement of shareholders' equity?

How does the equity method distort earnings?

Which equation represents an income statement?

How is it possible for a U.S.firm to have increasing earnings but a lower effective tax rate?