Question 1

The phrase "income from continuing operations" is used only when gains or losses on discontinued operations occur.

Accepted Answer

The phrase "income from continuing operations" is used to distinguish the income generated by the ongoing operations of a company from the income or loss resulting from discontinued operations. When a company discontinues a segment of its business, the gain or loss on the disposal of that segment is reported separately from the income from continuing operations.

Question 2

Dividends declared on common and preferred stock are subtracted from net income in the computation of earnings per share.

Accepted Answer

Dividends declared on preferred stock are subtracted from net income in the computation of earnings per share (EPS), but dividends on common stock are not. EPS is calculated by taking the net income minus preferred dividends and dividing by the average outstanding common shares.

Question 3

Revenues and gains increase both net income and owners' equity.

Accepted Answer

Revenues and gains increase net income, which in turn increases owners' equity.

Question 4

Intraperiod tax allocation relates the income tax expense of a fiscal period to the specific items that give rise to the amount of the tax provision.

Accepted Answer

Intraperiod tax allocation is the process of allocating income tax expense to the specific items in a given fiscal period, such as revenues and expenses. This ensures that the income tax expense is properly matched to the income that generated it, and provides a more accurate picture of the company's financial performance.

Question 5

Prior period adjustments can either be added or subtracted in the Retained Earnings Statement.

Accepted Answer

Prior period adjustments are recorded in the Retained Earnings Statement as an addition or subtraction to the beginning balance of retained earnings. If the adjustment is a positive amount, it will be added, and if it is a negative amount, it will be subtracted.

Question 6

The components of other comprehensive income can be reported in the statement of comprehensive income.

Accepted Answer

Other comprehensive income (OCI) includes items that are not reported in the income statement but are recognized under GAAP as being part of the overall income of a company. These items can include gains and losses from foreign currency translation, gains or losses on certain derivative instruments, unrealized gains or losses on available-for-sale securities, and certain pension adjustments. The components of OCI can be reported in the statement of comprehensive income, which is a financial statement that includes both net income and other comprehensive income.

Question 7

A strength of the income statement as compared to the balance sheet is that items which cannot be measured reliably can be reported in the income statement.

Accepted Answer

This statement is false. In fact, items that cannot be measured reliably should not be reported in the income statement. The income statement is based on the matching principle, which requires that expenses be matched with the revenues they help to generate in the same accounting period. Therefore, only items that can be reliably measured and directly related to the generation of revenues or the incurrence of expenses should be reported in the income statement.

Question 8

Companies report the results of operations of a component of a business that will be disposed of separately from continuing operations.

Accepted Answer

This is true. Companies are required to report the results of operations of a component of a business that will be disposed of separately from continuing operations as per accounting standards.

Question 9

Companies frequently report income tax expense as the last item before net income on a single-step income statement.

Accepted Answer

This statement is true. Income tax expense is typically reported as the last item before net income on a single-step income statement.

Question 10

A company that reports a discontinued operation or an extraordinary item must report per share amounts for these items.

Accepted Answer

According to GAAP (Generally Accepted Accounting Principles), companies must report per share amounts for discontinued operations and extraordinary items in the earnings-per-share calculation.

Question 11

Discontinued operations, extraordinary items, and unusual gains and losses are all reported net of tax in the income statement.

Accepted Answer

Extraordinary items are reported net of tax, but discontinued operations and unusual gains and losses are not necessarily reported net of tax.

Question 12

The income statement is useful in assessing the risk or uncertainty of achieving future cash flows.

Accepted Answer

The income statement provides information about a company's revenues, expenses, and net income, which can be used to assess the company's ability to generate cash flows in the future. By analyzing the trends and patterns in the income statement, investors and analysts can evaluate the risk and uncertainty of achieving the expected cash flows.

Question 13

Earnings management generally makes income statement information more useful for predicting future earnings and cash flows.

Accepted Answer

Earnings management involves manipulating financial information to present a more favorable picture of the company's financial performance. This can lead to distorted income statement information that is not a reliable predictor of future earnings and cash flows. In fact, it can undermine the usefulness of financial statements for investors and other stakeholders.

Question 14

A company should report a restructuring charge as an extraordinary item because these write-offs are not part of a company's ordinary and typical activities.

Accepted Answer

A restructuring charge should not be reported as an extraordinary item because it is a part of a company's ordinary and typical activities. It is a sign of a company's decision to restructure to improve its future prospects.

Question 15

Gross profit and income from operations are reported on a multiple-step but not on a single-step income statement.

Accepted Answer

Gross profit and income from operations are both calculated using multiple steps and require information from several sections of the income statement, including sales revenue, cost of goods sold, and operating expenses. Therefore, they are only reported on a multiple-step income statement and not on a simpler single-step statement that only shows total revenues and expenses.

Question 16

Companies often restrict retained earnings to comply with contractual requirements or current necessity.

Accepted Answer

Companies may restrict retained earnings for various reasons, including fulfilling contractual obligations or maintaining sufficient cash reserves for current operations.

Question 17

The accounting profession has adopted a current operating performance approach to income reporting.

Accepted Answer

The accounting profession primarily uses the all-inclusive concept for income reporting, which includes not just regular operations but also irregular items such as discontinued operations and extraordinary items.

Question 18

The transaction approach of income measurement focuses on the income-related activities that have occurred during the period.

Accepted Answer

The transaction approach of income measurement records and measures income based on the economic events or transactions that have taken place during the accounting period. This approach is also known as the accrual basis of accounting. It recognizes revenue when it is earned, and expenses when they are incurred, regardless of whether cash has been received or paid out.

Question 19

Comprehensive income includes all changes in equity during a period except those resulting from distributions to owners.

Accepted Answer

The answer of Comprehensive income includes all changes in equity...

Question 20

The primary advantage of the multiple-step format lies in the simplicity of presentation and the absence of any implication that one type of revenue or expense item has priority over another.

Accepted Answer

The statement is incorrect. The primary advantage of the multiple-step format is that it provides more detailed information about the different components of revenue and expenses, thereby helping users to analyze the financial performance of the company more comprehensively.

Quiz 4: Income Statement and Related Information