Question 1

Gross profit measures the overall profitability of a company.

Accepted Answer

Gross profit measures the profitability of a company's core business activities, excluding other expenses like operating costs, taxes, and interest.

Question 2

Ongoing expenses incurred by the entity, other than direct expenses for merchandise and other costs directly related to sales, are called:
A) other expenses.
B) extraordinary items.
C) cost of goods sold.
D) operating expenses.

Accepted Answer

Direct expenses related to merchandise and sales are typically included in the cost of goods sold. Ongoing expenses such as rent, salaries, and utilities are considered operating expenses. "Other expenses" is a vague term and could include any type of expense, not necessarily ongoing expenses. Extraordinary items are infrequent and unusual events that are not considered part of regular operations, such as a lawsuit settlement or natural disaster.

Question 3

U.S. GAAP and IFRS do not have the same revenue recognition criteria.

Accepted Answer

U.S. GAAP and IFRS have different revenue recognition criteria.

Question 4

Sales revenue less cost of goods sold is called:
A) gross profit.
B) net income.
C) net profit.
D) net sales.

Accepted Answer

Gross profit is the difference between sales revenue and cost of goods sold, and represents the amount of money that a company has made from selling its products or services after accounting for the direct costs of producing those goods or services. It does not include other expenses such as overhead expenses, taxes, and interest expenses.

Question 5

If net sales are $1,200,000 and cost of goods sold are $300,000, gross profit is $900,000.

Accepted Answer

Gross profit is calculated by subtracting the cost of goods sold from net sales. Therefore, Gross profit = Net sales - Cost of goods sold = $1,200,000 - $300,000 = $900,000.

Question 6

A type of financial statement fraud that is accomplished by shipping more to customers than they ordered, with the expectation that they may return some or all of the items is called:
A) improper shipping recognition.
B) improper sales recognition.
C) channel stuffing.
D) accidental shipping.

Accepted Answer

Channel stuffing is a type of financial statement fraud where a company over-ships or over-supplies their product to a distributor or customer, with the expectation that they will return some or all of it. The company then recognizes the excess shipments as sales, falsely inflating their revenue and profit. This practice is illegal and unethical, and can mislead investors and stakeholders.

Question 7

Financial statement fraud does not include the improper recognition of expenses.

Accepted Answer

Financial statement fraud can include the improper recognition of expenses, such as intentional misclassification of expenses as assets or delaying the recognition of expenses to inflate profits.

Question 8

The characteristic of earnings that makes it most useful for decision making is called:
A) extraordinary item.
B) earnings quality.
C) comprehensive income.
D) clean opinion.

Accepted Answer

Earnings quality is the characteristic of earnings that makes it most useful for decision making. This refers to the degree to which earnings provide an accurate reflection of a company's financial performance. High-quality earnings are more reliable and predictable, which can help investors and other stakeholders make better decisions. Extraordinary items, comprehensive income, and clean opinions are all related to financial reporting but are not specifically related to the usefulness of earnings for decision making.

Question 9

The operating expense section of an income statement would NOT include:
A) salaries expense.
B) utilities expense.
C) supplies expense.
D) interest expense.

Accepted Answer

The operating expense section includes expenses related to the day-to-day operations of the business such as salaries, utilities, and supplies. However, interest expense is considered a non-operating expense and is typically listed separately on the income statement.

Question 10

Steadily decreasing cost of goods sold as a percentage of net sales is a sign of:
A) increasing earnings quality.
B) decreasing earnings quality.
C) lower sales.
D) higher sales.

Accepted Answer

A decrease in cost of goods sold as a percentage of net sales indicates that the company is efficiently managing its costs and expenses, which improves the quality of earnings. This can be achieved through cost-cutting measures or improved operational efficiency. Therefore, option A is the correct answer.

Question 11

If ABC Corporation has net sales of $600,000 and cost of goods sold of $390,000, the gross profit percentage is:
A) 65%.
B) 54%.
C) 35%.
D) 25%.

Accepted Answer

The formula for gross profit percentage is:

Gross profit percentage = (Gross profit / Net sales) x 100

where gross profit is calculated as:

Gross profit = Net sales - Cost of goods sold

Given: 
Net sales = $600,000 
Cost of goods sold = $390,000

Using the formula:

Gross profit = $600,000 - $390,000 = $210,000

Gross profit percentage = ($210,000 / $600,000) x 100 = 35%

Therefore, the best choice is C, with an explanation as shown above.

Question 12

There will be income from operations if:
A) revenues are greater than cost of goods sold.
B) revenues are greater than operating expenses.
C) gross profit is greater than operating expenses.
D) cost of goods sold is greater than operating expenses.

Accepted Answer

Income from operations is calculated as gross profit minus operating expenses. If gross profit is greater than operating expenses, there will be income from operations.

Question 13

The purpose of channel stuffing is to increase operating expenses.

Accepted Answer

The answer of The purpose of channel stuffing is to...

Question 14

Revenue fraud includes all of the following EXCEPT:
A) reporting revenue when goods have not yet been delivered.
B) channel stuffing.
C) sales to nonexistent customers.
D) recognizing revenue when earned.

Accepted Answer

Revenue fraud involves intentionally misrepresenting the revenue generated by a company through deceptive or fraudulent practices. Options A, B, and C are all examples of revenue fraud. However, recognizing revenue when earned is a legitimate accounting practice and not considered revenue fraud.

Question 15

Roughly half of all financial statement frauds over the past two decades have involved:
A) improper expense recognition.
B) improper revenue recognition.
C) improper depreciation methods.
D) bankruptcy.

Accepted Answer

Improper revenue recognition is the answer. Studies have shown that nearly 50% of all financial statement fraud involves this type of fraud, where companies manipulate their revenue figures to create a false impression of financial health. This can include prematurely recognizing revenue, inflating sales figures, or hiding sales returns and allowances. Improper expense recognition, on the other hand, is not as common, accounting for only 13% of financial statement fraud cases. Similarly, improper depreciation methods and bankruptcy are not as prevalent in financial statement fraud cases.

Question 16

The revenue recognition principle requires that sales revenues be recognized when they are earned.

Accepted Answer

The revenue recognition principle is a fundamental accounting concept that states that revenues should be recognized (recorded in the financial statements) when they are earned, regardless of when payment is received. This means that revenue should be recognized when the products or services have been delivered, and the customer is obligated to pay for them.

Question 17

The gross profit rate is computed by dividing gross profit by:
A) cost of goods sold.
B) net sales.
C) net income.
D) operating expenses.

Accepted Answer

Gross profit rate is calculated by dividing gross profit by net sales.

Question 18

The degree to which earnings are an accurate reflection of underlying economic events for both revenues and expenses, and the extent to which earnings from a company's core operations are improving over time, is:
A) earnings quality.
B) comprehensive income.
C) revenue recognition.
D) discontinued operations.

Accepted Answer

Earnings quality refers to the degree to which earnings are an accurate reflection of underlying economic events for both revenues and expenses, and the extent to which earnings from a company's core operations are improving over time. It is a measure of the reliability and relevance of a company's financial statements. Comprehensive income refers to all changes in equity during a period, including both net income and other comprehensive income. Revenue recognition refers to the accounting principle that determines when revenue should be recognized in a company's financial statements. Discontinued operations refer to a segment or business that a company has disposed of, which is reported separately in the financial statements.

Question 19

Recognizing revenue before it is earned is a major source of financial statement fraud.

Accepted Answer

Recognizing revenue before it is earned is a common tactic used in financial statement fraud known as "premature revenue recognition". This involves recording revenue from a sale or contract before the company has actually completed the work or delivered the product, artificially inflating their revenue and profits.

Question 20

Gross profit is calculated by dividing cost of goods sold by net sales.

Accepted Answer

Gross profit is calculated by subtracting cost of goods sold from net sales. The formula is: Gross profit = Net sales - Cost of goods sold.

Quiz 11: The Income Statement, the Statement of Comprehensive Income, the Statement of Stockholders Equity

Gross profit measures the overall profitability of a company.

Ongoing expenses incurred by the entity, other than direct expenses for merchandise and other costs directly related to sales, are called:

U.S. GAAP and IFRS do not have the same revenue recognition criteria.

Sales revenue less cost of goods sold is called:

If net sales are $1,200,000 and cost of goods sold are $300,000, gross profit is $900,000.

A type of financial statement fraud that is accomplished by shipping more to customers than they ordered, with the expectation that they may return some or all of the items is called:

Financial statement fraud does not include the improper recognition of expenses.

The characteristic of earnings that makes it most useful for decision making is called:

The operating expense section of an income statement would NOT include:

Steadily decreasing cost of goods sold as a percentage of net sales is a sign of:

If ABC Corporation has net sales of $600,000 and cost of goods sold of $390,000, the gross profit percentage is:

There will be income from operations if:

The purpose of channel stuffing is to increase operating expenses.

Revenue fraud includes all of the following EXCEPT:

Roughly half of all financial statement frauds over the past two decades have involved:

The revenue recognition principle requires that sales revenues be recognized when they are earned.

The gross profit rate is computed by dividing gross profit by:

The degree to which earnings are an accurate reflection of underlying economic events for both revenues and expenses, and the extent to which earnings from a company's core operations are improving over time, is:

Recognizing revenue before it is earned is a major source of financial statement fraud.

Gross profit is calculated by dividing cost of goods sold by net sales.