Question 1

Irregular or unusual gains or losses that don't relate to discontinued operations
A)may be reported separately if they are material in amount.
B)are generally combined with other gains and losses if they are immaterial.
C)must be shown above "income before discontinued operations" and before the provision for income tax.
D)All of these

Accepted Answer

Irregular or unusual gains or losses that don't relate to discontinued operations may be reported separately if they are material in amount, but are generally combined with other gains and losses if they are immaterial. They must be shown above "income before discontinued operations" and before the provision for income tax.

Question 2

The business model may be broken up into three activities:
A)investing, operating, allocating.
B)balance sheet, income statement, cash flow statement.
C)investing, operating, financing.
D)balance sheet, income statement, retained earnings statement.

Accepted Answer

Investing, operating, and financing activities are the three main categories of a business model, as they represent the major ways in which a company generates and uses its funds. Investing activities refer to the purchase and sale of long-term assets, such as property or equipment, while operating activities relate to the day-to-day operations of the business, such as sales and expenses. Financing activities involve raising and paying back funds, such as issuing stocks or paying off loans. Choice A includes allocating, which is not a distinct activity, but rather a function carried out within each of the three main activities. Choice B correctly lists the financial statements, but does not represent distinct activities themselves. Choice D includes retained earnings statement, which is not a commonly used financial statement and can be considered a component of the income statement.

Question 3

Expenses may be presented in the income statement
A)by nature or by function
B)by amount or in alphabetical order
C)by geographical area or by the single-step method
D)by current or non-current

Accepted Answer

Expenses are typically presented in the income statement by either nature (such as cost of goods sold or salaries and wages) or by function (such as selling, general and administrative expenses), as these categories provide better insight into the company's operations and help users analyze trends in expenses over time. The other options listed (B, C, and D) are not commonly used methods for presenting expenses in the income statement.

Question 4

The concept of comprehensive income
A)Is not relevant under IFRS
B)Is not relevant under private entity GAAP
C)Can be replaced with the concept of discontinued operations under private entity
D)None of these

Accepted Answer

The answer of The concept of comprehensive income
A)Is not relevant...

Question 5

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.

Accepted Answer

Earnings management refers to manipulating a company's financial statements to meet a desired level of earnings. This practice can be used to avoid negative market reactions or to maximize executive bonuses, but it can also be considered fraudulent if it involves misrepresenting the company's true financial position.

Question 6

The major elements of the income statement are
A)revenue, cost of goods sold, selling expenses, and general expense.
B)operating section, non-operating section and discontinued operations.
C)revenues, expenses, gains, and losses.
D)all of these.

Accepted Answer

The major elements of the income statement are revenues, expenses, gains, and losses. Choice A breaks down expenses into specific categories, while choice B breaks down the income statement into sections. However, all of these categories fall under the umbrella of revenues, expenses, gains, and losses. Therefore, choice C is the best answer.

Question 7

The occurrence which most likely would have no effect on 2011 net income (assuming that all amounts involved are material) is the
A)sale in 2011 of an office building contributed by a stockholder in 1987.
B)collection in 2011 of a receivable from a customer whose account was written off in 2010 by a charge to the allowance account.
C)settlement based on litigation in 2011 of previously unrecognized damages from a serious accident which occurred in 2008.
D)worthlessness determined in 2011 of stock purchased on a speculative basis in 2007.

Accepted Answer

The collection of a receivable that was previously written off does not affect net income, as it is recorded as a recovery of bad debts, which is a balance sheet transaction.

Question 8

A company's balance sheet
A)Would never include accumulated other comprehensive income (because it is an income statement item).
B)May include accumulated other comprehensive income if the company follows IFRS
C)May include accumulated other comprehensive income if the company follows private entity GAAP
D)None of these

Accepted Answer

Accumulated other comprehensive income is a component of equity on the balance sheet under both IFRS and US GAAP, reflecting items not included in net income.

Question 9

The concept of 'soft numbers' reflects that
A)financial statement numbers may be manipulated.
B)sometimes significant measurement uncertainty exists.
C)earnings numbers may not be sustainable.
D)sometimes significant errors exist.

Accepted Answer

The concept of 'soft numbers' refers to situations where significant measurement uncertainty exists and the reported numbers may not be completely accurate. This can occur, for example, when estimating the value of hard-to-measure assets or liabilities, or when using subjective estimates such as the useful life of an asset or the probability of an uncertain event occurring. This concept is distinct from financial statement manipulation, unsustainable earnings, or significant errors, which may also be factors that impact the accuracy of financial statement numbers.

Question 10

The concept of intraperiod tax allocation is used for
A)income from continuing operations
B)income from discontinued operations
C)other comprehensive income
D)All of these

Accepted Answer

Intraperiod tax allocation is used for all types of income in order to allocate income tax expenses to the specific component of income, such as continuing operations or discontinued operations, that generated the income. This ensures that the correct amount of income tax expense is allocated to each component of income and is reported accurately in the financial statements.

Question 11

The single-step income statement emphasizes
A)the gross profit figure.
B)total revenues and total expenses.
C)extraordinary items and accounting changes more than these are emphasized in the multiple-step income statement.
D)the various components of income from continuing operations.

Accepted Answer

The single-step income statement simply lists the total revenues and total expenses, making them the main focus. It does not provide any breakdown of the components of income from continuing operations, nor does it give special emphasis to extraordinary items and accounting changes. The gross profit figure is also not specifically highlighted.

Question 12

Which of the following is an acceptable method of presenting the income statement?
A)A single-step income statement
B)A multiple-step income statement
C)A consolidated statement of income
D)All of these

Accepted Answer

All three methods (single-step, multiple-step, and consolidated) are acceptable ways to present the income statement. The choice of method will depend on the company's preferences and reporting requirements.

Question 13

The income statement strives to capture the
A)financing activities.
B)investing activities.
C)interrelationship between the activities.
D)operating activities.

Accepted Answer

The income statement captures the operating activities, such as revenues and expenses, and does not directly address financing or investing activities.

Question 14

The concept of transparency mandates 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 the managers.
D)all of the above.

Accepted Answer

Transparency requires that financial statements reflect the true economic reality of a business, which is essential for stakeholders to make informed decisions. Including everything, no matter how small, or reflecting biases of managers would not support this goal of transparency.

Question 15

Which of the following is a required disclosure in the income statement when reporting a change in accounting principle?
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 should be disclosed immediately after discontinued operations.
D)None of these.

Accepted Answer

The answer of Which of the following is a required...

Question 16

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 consolidated statement of income
D)Including gains and losses from discontinued operations of a segment of a business in determining net income

Accepted Answer

Generally, corrections of errors made in a prior period are not included in the income statement. They are adjusted in the prior period's financial statements through a restatement or other appropriate method. The other options listed (single-step income statement, consolidated statement of income, and including gains and losses from discontinued operations) are all commonly used methods of presenting the income statement.

Question 17

Information in the income statement helps users to
A)evaluate the past performance of the enterprise.
B)provide a basis for predicting future performance.
C)help assess the risk or uncertainty of achieving future cash flows.
D)all of these.

Accepted Answer

The income statement presents the financial performance of the enterprise over a specific period. It helps users in evaluating past performance, predicting future performance, and assessing the risk or uncertainty of achieving future cash flows. Therefore, all three options are correct, and the best choice is D, i.e., all of these.

Question 18

When expenses are presented by function in the income statement
A)Their breakdown should be disclosed.
B)They should be reported as part of other comprehensive income.
C)Their cash flow predictive value is decreased
D)(a) and (c)

Accepted Answer

The answer of When expenses are presented by function in...

Question 19

Which of the following is a change in accounting principle?
A)A change in the estimated service life of machinery
B)A change estimated allowance for bad debts
C)A change in the estimated future warranty expense
D)A change from FIFO to weighted average for inventory

Accepted Answer

A change from FIFO to weighted average for inventory is a change in accounting principle, as it involves a shift in the method used to value inventory. The other options represent changes in estimates or assumptions, which do not constitute a change in accounting principle.

Question 20

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 judgement.
D)income numbers are affected by the accounting methods employed.

Accepted Answer

The income statement can include both actual and estimated amounts in determining net income. Therefore, option B is not a limitation of the income statement. The other options (A, C, and D) are limitations of the income statement.

Quiz 4: Reporting Financial Performance

Irregular or unusual gains or losses that don't relate to discontinued operations

The business model may be broken up into three activities:

Expenses may be presented in the income statement

The concept of comprehensive income

Earnings management is

The major elements of the income statement are

The occurrence which most likely would have no effect on 2011 net income (assuming that all amounts involved are material) is the

A company's balance sheet

The concept of 'soft numbers' reflects that

The concept of intraperiod tax allocation is used for

The single-step income statement emphasizes

Which of the following is an acceptable method of presenting the income statement?

The income statement strives to capture the

The concept of transparency mandates that the financial statements

Which of the following is a required disclosure in the income statement when reporting a change in accounting principle?

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

Information in the income statement helps users to

When expenses are presented by function in the income statement

Which of the following is a change in accounting principle?

Limitations of the income statement include all of the following except