chapter 5--the income state and the statement of cash flow

5/26/2018 Chapter 5--The Income State and the Statement of Cash Flow

Chapter 5--The Income Statement and the Statement of Cash

Flows

Student: ___________________________________________________________________________

1. Together with the cash flow statement, the income statement enables the investors to determine the rate ofreturn the company is generating relative to the amount of capital invested.True False

2. The income statement predicts a companys future income and cash flows.True False

3. The amount of money that can be distributed to shareholders as a return oncapital, without being a return ocapital, is the capital financial concept.True False

4. .!. "##$ and %F&! companies commonly measure and report net income and comprehensive income.True False

'. &evenue can be recogni(ed either when it is earned or collection has occurred or reasonably certain to occuTrue False

). !ystematic and rational allocation is used to recogni(e revenue.True False

*. %f a company does not have any discontinued operations or e+traordinary items to list on its incomestatement, the labels should still be there with a (ero balance noted.True False


. %nterperiod ta+ allocation involves apportioning a corporations total income ta+ e+pense for a period to thevarious components of its net income and other comprehensive income items.True False

-. hen a parent company owns a ma/ority of the common shares of a subsidiary company but not 100 ofthem, the parent company will consolidate all of the subsidiarys revenues and e+penses into its financial

statements.True False

10. hen a company classifies a component as held for sale it must report the component on its balance sheethe lower of its boo value or its fair value minus costs to sell.True False

11. # company does nothave to disclose information about the sale of a discontinued component in the notesits financial statements until the actual sale has occurred.True False

12. # terrorist attac would be considered an e+traordinary event because terrorist attacs are infreuent innature.True False

13. To classify an event or transaction as e+traordinary it must be unusual in nature and infreuent inoccurrence.True False

14. There is no prescribed income statement format under %F&! whereas .!. "##$ reuires the use of thesinglestep or the multiplestep format.True False

1'. To compute earnings per share the denominator is net income attributable to common shareholders less anpreferred stoc dividends for the period.True False


1). nder .!. "##$ or %F&!, a company can report its comprehensive income or loss under present netincome and comprehensive income in a single continuous performance statement or in a separate butconsecutive financial statement.True False

1*. "ains or losses associated with derivative financial instruments would be included in income from

continuing operations.True False

1. The statement of cash flows provides e+ternal users the ability to analy(e the information reuired to accea companys ris, liuidity, financial fle+ibility, and operating capability.True False

1-. The most common way in which to prepare the statement of cash flows is the indirect method, which isencouraged by F#!5.True False

20. 6ompanies with lower coverage ratios have a greater ris and a lower financial fle+ibility.True False

21. The !76 scrutini(es reported earnings numbers to assess the uality of earnings and to detect any potentifor earnings management.True False

22. # segment must pass all of the tests in order for it to be considered a reportable segment. These tests incluthe revenue, profit, and asset tests.True False

23. # company is not reuired to follow a specific format in maing the disclosures for its segments but F#!5encourages the most useful format for its specific circumstances.True False


24. ho is the income statement designed to inform8#. creditors5. investors6. lenders9. all of these

2'. :perating capability refers to#. the ability of a company to adapt to une+pected needs and opportunities5. the uncertainty or unpredictability of the future results of a company6. a measure of overall company performance9. a company;s ability to maintain a given level of operations

2). The income statement helps users#. assess the companys ris5. review the impact of economic factors affecting the company

6. compare and contrast performance against a competitor9. all of these

2*. hich of the following is helpful to report separately8#. e+penses that vary with volume of activity5. e+penses that are discretionary6. e+penses that depend on other economic factors9. all of these

2. hich of the following is nota purpose of the income statement8#. used to evaluate managements performance5. predicts the companys future assets and liabilities6. used to compare performance against other companies9. assesses the companys ris

2-. The income statement is an important financial statement for all of the following reasons, except

#. the income statement helps shareholders evaluate management;s operating effectiveness5. past income statements can be useful indicators in predicting current and future cash dividend payments aswell as future stoc prices6. the income statement provides useful information concerning the corporation;s ability to generate sufficiencash flows from operations for use in payment of its operating obligations9. the income statement reports the amount of net cash inflows resulting from operating, financing, andinvesting activities to users


30. %n accrual accounting, net income is defined as#. &evenues 7+penses < "ains < =osses5. &evenues 7+penses6. &evenues 7+penses < "ains =osses9. increase in net assets from nonowner transactions

31. The income statement reports#. revenue and e+penses for a given point in time.5. revenue and e+penses for a specific date.6. revenue, e+penses, gains and losses for a specified period of time.9. revenues, e+penses, gains and losses for a specific date.

32. 5elow is a list of account balances for Fraggle 6ompany>

6ash ? 123,'00

6ost of "oods !old *)*,'00

"ross $rofit '0*,'00

%ncome before ta+es 233,400

%ncome ta+ e+pense 8

%nterest e+pense 14,*00

%nterest revenue ',)00

%nventory 113,4)0

@et %ncome 8

@umber of 6ommon !hares 1'0,000

:perating e+penses 2)',000

:perating %ncome 242,'00

$roperty, plant, and euipment AnetB 2'',000

&eceivables AnetB -),000!ales AnetB 1,2*',000

hat is Fraggle 6ompanys net income, assuming a 30 ta+ rate8 #. ?1)3,305. ?233,4006. ?242,'009. none of these

33. :n 9ecember 31, 2014, the net assets of Cartine( Canufacturing amounted to ?40,000. @et incomecalculated by using the financial capital maintenance concept amounted to ?12,000. 9uring the year, additioncommon stoc was issued for ?,000, and ?',000 of dividends was paid. The net assets at Danuary 1, 2014,amounted to#. ?31,0005. ?3*,0006. ?20,0009. ?2',000


34. "eorgio 6ompany began 2014 with net assets of ?0,000. @et income calculated by using the capitalmaintenance concept was ?21,000. 9uring 2014 owners contributed ?2),000 of new capital. 5y yearend, thenet assets totaled ?*,000. 9ividends to the owners during 2014 were#. ?4-,0005. ?2,0006. ?23,0009. ?2,000

3'. %n general, revenue is recogni(ed as being earned#. during the production process5. upon completion of the production process6. when cash is received9. when goods are sold or services are rendered

3). &eali(ation of revenue occurs when

#. the item is formally recorded and reported in the financial statements5. noncash resources are converted into cash or rights to cash6. the actual e+change of noncash resources into cash9. when a transaction is both reali(ed and reali(able

3*. To be recogni(ed as revenue, an item must#. meet the definition of earned revenue5. be earned revenue and be reali(ed or reali(able6. be reali(ed

9. be earned

3. :ne method of revenue recognition that postpones the recognition until after the time of sale is#. percentageofcompletion5. proportional performance6. cost recovery9. point of sale

3-. hich of the following is notan e+pense recognition approach recogni(ed by the F#!5 as an e+penserecognition principle to properly match e+penses against revenues8#. immediate recognition5. systematic and rational allocation6. cash payment9. association of cause and effect


40. 7+amples of matching e+penses against revenues using the association of cause and effect include all of tfollowing except#. insurance costs5. transportation costs for delivery of goods to customers6. costs of products sold9. sales commissions

41. 9epreciation is an e+ample of which e+pense recognition principle8#. association of cause and effect5. systematic and rational allocation6. cost recovery9. immediate recognition

42. hich of the following e+penses is an e+ample of e+pense recognition under the immediate recognitionprinciple8

#. sales commissions5. depreciation6. management salaries9. transportationout

43. %n distinguishing between revenues and gains, which of the following statements isfalse8#. Core gains than revenues are beyond the entity;s control.5. "ains are associated more with peripheral, nonoperating activities than are revenues.6. "##$ does not provide precise distinctions between revenues and gains.

9. &evenues are reported net Arather than grossB more often than gains.

44. The ma/or components of the income statement are listed below>

# E e+traordinary items5 E income from continuing operations6 E earnings per share9 E results from discontinued operations

%n what seuence do they normally appear on the income statement8#. 5#965. 5#696. 59#69. 5969


4'. hich of the following are components of the income statement8#. revenues5. e+traordinary items6. income from continuing operations9. all of these

4). hich of the following would appear after the heading of operating income8#. cost of goods sold5. other operating income items Agains or lossesB6. operating e+penses9. unusual and nonrecurring gains or losses

4*. hich of the following is nota component of the income statement8#. unusual and nonrecurring gains and losses5. net income

6. income ta+es9. accumulated other comprehensive income

4. The subtotal, gross profit, will be disclosed on#. a multiplestep income statement5. both multiplestep and singlestep income statements6. neither multiplestep nor singlestep income statements9. a singlestep income statement

4-. hich of the following is notused as a caption if there is nothing to report8#. income from continuing operations5. e+traordinary items6. interest e+pense9. income ta+es

'0. #ll of the following are included in the computation of cost of goods sold except

#. freightout5. purchase returns and allowances6. beginning finished goods inventory9. freightin


'1. From the following information, compute cost of goods sold.

$urchase returns ? 1,200%nventory, 9ecember 31 2,'00Freightin 1,100%nventory, Danuary 1 2,00$urchases 1',000

#. ?1',3005. ?1',2006. ?1',1009. ?1',000

'2. #ll of the information reuired in the computation of cost of goods sold is presented below, e+cept forpurchases, which must be what amount8

$urchase returns ? 1,200%nventory, 9ecember 31 2,'006ost of goods sold 10,'00$urchases 8%nventory, Danuary 1 2,'00Freightin 1,'00

#. ?10,005. ?11,2006. ?-,*009. ?10,200

'3. The gross profit of =arry 6ompany for 2014 is ?300,000, cost of goods manufactured is ?400,000, thebeginning inventories of goods in process and finished goods are ?2,000 and ?3',000, respectively, and theending inventories of goods in process and finished goods are ?'0,000 and ?*0,000, respectively. The cost ofgoods sold of =arry 6ompany for 2014 must have been#. ?3*,0005. ?2)',0006. ?2*,0009. ?3)',000


'4. %n 2014, 9allas 6ompany had sales of ?)00,000 cost of sales of ?430,000 interest e+pense of ?12,000 again on the sale of a component of ?'2,000 and an e+traordinary loss of ?2',000. For its income statement,9allas uses the singlestep format and the allinclusive concept. hat was 9allas;s reported preta+ income frocontinuing operations8#. ?1'0,0005. ?1*0,0006. ?1',0009. ?11,000

''. %ntraperiod ta+ allocation#. is used to allocate a company;s total income ta+ e+pense to the components of net income andcomprehensive income5. involves temporary AtimingB differences between financial and ta+able incomes6. reuires allocation of deferred ta+es across accounting periods9. results from differences between ta+ regulations and the principles followed to determine financial income

'). %ntraperiod ta+ allocation reuires a corporation;s total income ta+ e+pense to be allocated to all of thefollowing except#. e+traordinary items5. other revenues and e+penses6. discontinued operations9. priorperiod ad/ustments

'*. # company that discontinues and disposes of an operation AcomponentB should include the gain or loss on

sale in the income statement as aAnB#. priorperiod ad/ustment5. e+traordinary item6. amount after income from continuing operations and before e+traordinary items9. bul sale of fi+ed assets included in income from continuing operations

'. hen an entity reports on a sale of a component of the business#. any income or loss from operations of the component should be reported in the income from continuingoperations section, but any gain or loss on the sale of the component should be presented below the income

from continuing operations section5. current operating income or loss of the component and any gain or loss on sale of the component should bpresented in a separate section of the income statement6. any gain or loss on the sale should always be presented in the e+traordinary gain or loss section of theincome statement9. all information related to the sold component should be reported solely in the footnotes accompanying thefinancial statements


'-. hich of the following is a reuired disclosure in the income statement when reporting the sale of acomponent of the business8#. The gain or loss on sale should be reported as an e+traordinary item.5. &esults of operations of a discontinued component should be disclosed immediately below e+traordinaryitems.6. 7arnings per share from both income from continuing operations and net income should be disclosed on thface of the income statement.9. &evenue and e+penses applicable to the discontinued operations should be disclosed in the income

statement.

)0. hich is leastliely to be classified as a sale of a component8#. sale by a communications company of its radio stations, but none of its television stations5. sale by a food distributor of its wholesale supermaret division while maintaining its wholesale fastfoodrestaurants division6. sale by an apparel manufacturer of a woolen suit manufacturing plant in order to concentrate on themanufacture of suits from synthetic products9. sale by a meatpacing company of its AentireB 20 interest in a professional football team

)1. "regory 6ompany is disposing of a component of its company. The net loss from the sale is estimated to ?)00,000. %ncluded in the ?)00,000 is termination pay of ?100,000, which is directly associated with thedecision to dispose of the component and net losses from component asset writedowns of ?400,000. %gnorinta+es, "regory;s income statement should report a loss on sale of a business component of#. ?100,0005. ?400,0006. ?'00,0009. ?)00,000

)2. Exhibit 5-1The following condensed income statement of &anger 6orporation is presented for the two years ended9ecember 31, 2014 and 2013>

2014 2013@et sales ?10,000,000 ?-,000,0006ost of sales ),000,000 ),000,000"ross profit ? 4,000,000 ?3,000,000

:perating e+pense 2,'00,000 2,000,000:perating income ? 1,'00,000 ?1,000,000"ain on sale of a component -00,000

? 2,400,000 ?1,000,000%ncome ta+ e+pense *20,000 300,000

@et income ? 1,)0,000 ? *00,000

:n Danuary 1, 2014, &anger entered into an agreement to sell one of its separate operating divisions for ?2,000,000. The sale resulted in a gain ondisposition of ?-00,000 on @ovember 12, 2014, and ualifies as a discontinued component. This division;s contribution to &angers reported inco

before income ta+es for each year was as follows>

2014 ?*00,000 loss


2013 ?400,000 loss

#ssume an income ta+ rate of 30.

&efer to 7+hibit '1. %n the preparation of a revised comparative income statement, &anger should report income from continuing operations after

income ta+es for 2014 and 2013, respectively, amounting to#. ?1,'40,000 and ?*00,0005. ?1,'40,000 and ?-0,000

6. ?1,)0,000 and ?*00,0009. ?1,)0,000 and ?-0,000


2014 2013@et sales ?10,000,000 ?-,000,0006ost of sales ),000,000 ),000,000

"ross profit ? 4,000,000 ?3,000,000:perating e+pense 2,'00,000 2,000,000:perating income ? 1,'00,000 ?1,000,000"ain on sale of a component -00,000

? 2,400,000 ?1,000,000%ncome ta+ e+pense *20,000 300,000

@et income ? 1,)0,000 ? *00,000



2014 ?*00,000 loss

2013 ?400,000 loss


&efer to 7+hibit '1. %n the preparation of a revised comparative income statement, &anger should report under the caption G9iscontinued

:perationsG for 2014 and 2013, respectively,#. income of ?140,000 and a loss of ?20,0005. income of ?140,000 and a loss of ?06. income of ?200,000 and a loss of ?400,0009. a loss of ?*00,000 and a loss of ?400,000

)4. @elly 6ompany sold its cattle ranching component on Dune 30, 2014, for a gain of ?1,000,000. FromDanuary through Dune, the component had sustained operating income of ?300,000. The income ta+ rate is 3'How should @elly report the income and the sale on its income statement8#. as ?300,000 operating income and a ?1,000,000 gain on sale of component5. as a ?1,300,000 gain in operating income6. as a net of ta+ gain of ?4',000 after income from continuing operations9. as ?1-',000 operating income and a ?)'0,000 gain on sale of the component shown before e+traordinaryitems


)'. hich of the following is reuired to be disclosed, pursuant to "##$8#. operating income or loss from discontinued component reported on the income statement5. a description of facts and circumstances leading up to the sale of a discontinued component within the noteof the financial statements6. all gains or losses from sale of the component reported on the income statement or in the footnotes9. all of these

)). To be considered an e+traordinary item, an event must be#. unusual5. unusual or infreuent6. infreuent9. infreuent and unusual

)*. For an event or transaction to be classified as an e+traordinary item in the income statement, it should be#. infreuent and material, but it need not be unusual in nature

5. unusual in nature and material, but it need not be infreuent6. unusual in nature, infreuent, and material9. unusual in nature and infreuent, but it need not be material

). hich of the following material gainsIlosses would be disclosed as an e+traordinary item on an entity;sincome statement8#. a loss arising from the writeoff of a large uncollectible accounts receivable balance5. a loss arising from the e+propriation of a manufacturing plant by a foreign government6. a gain from the sale of a component of the entity;s business

9. a gain from the sale of manufacturing euipment no longer needed by the entity

)-. nder which of the following conditions would hurricane damage be considered an e+traordinary item forincome reporting purposes8#. only if hurricanes in the geographical area are unusual in nature and occur infreuently5. only if hurricanes are normal in the geographical area but do not occur freuently6. only if hurricanes occur freuently in the geographical area but can be covered by insurance policies9. under any circumstances hurricane damage should be classified as an e+traordinary item

*0. How should the gain or loss that is considered infreuent but not unusual in nature be disclosed8#. separately in the income statement immediately after income from continuing operations5. on a netofta+ basis in the income statement immediately after income from continuing operations6. as an e+traordinary item9. separately in the income statement as a component of income from continuing operations


*1. %n 2014, aler 6ompany wrote off a ?300,000 debt from a ma/or customer, lost ?2,2'0,000 when a forecountry devalued its currency, gained ?2,'00,000 when a manufacturing plant was destroyed by a unusual aninfreuent flood, lost ?)00,000 on the early retirement of its longterm bonds, and lost ?*',000 on the sale ofstoc from its investment portfolio. hat amount of e+traordinary items Abefore income ta+esB will alerreport in 20148#. ?3*',0005. ?)00,0006. ?2,'00,000

9. ?4,*'0,000

*2. aters 7dge 6ompany operates a manufacturing plant overlooing the 6hesapeae 5ay. %n early 201', ahurricane destroyed the uninsured plant, resulting in ?'00,000 damage. !uch damage had occurred previouslyonly once in the last 110 years. aters 7dges ?'00,000 loss should be reported on the income statement#. after ordinary income, but before e+traordinary items5. as an e+traordinary item6. as an ad/ustment to net income9. as a separate component of income from continuing operations

*3. How should a material, infreuent event not meeting the criteria for an e+traordinary item be disclosed inthe income statement8#. shown as a separate item in income from continuing operations5. shown in income from continuing operations but not shown as a separate item6. shown after income from continuing operations but before e+traordinary items9. shown after e+traordinary items net of income ta+ but before net income

*4. # review of the 9ecember 31, 2014, financial statements of &un 6orporation revealed that under the captiGe+traordinary losses,G &un reported a total of ?300,000. Further analysis revealed that the ?300,000 in lossescomprised the following items>

1. &un recorded a gain of ?0,000 incurred in the sale of euipment.2. %n an unusual and infreuent occurrence, a loss of ?3'0,000 was sustained as a result of tornado damage to a manufacturing facility.3. 9uring 2014, several factories were shut down during a ma/or strie by employees of &un;s ma/or customer. !hutdown e+penses

totaled ?1'0,000.4. %nventory in the amount of ?30,000 was written off as obsolete.

%gnoring income ta+es, what amount of loss should &un have reported as an e+traordinary loss on its 2014 income statement8 #. ?1'0,0005. ?3'0,0006. ?20,0009. ?'00,000


*'. 7arnings per share is an important disclosure because#. it provides information relevant to the common stocholders5. net income disclosed in the financial statements can fluctuate based upon management;s intentions6. it forces common and preferred stocholders to read the financial statements9. it uses net income

*). The numerator in the earnings per share calculation is#. only the amount available to common stocholders5. net income attributable to common shareholders6. net income minus declared preferred stoc dividends9. all of these

**. Corgan 6ompany reported the following information for the year ended 9ecember 31, 2014>

@et income ? )00,000$referred dividends declared and paid )0,0006ommon dividends declared and paid -0,000#verage common shares outstanding -0,0007nding maret price per share 4'

@et sales ',100,000

Corgans earnings per share for 2014 was#. ?).)*5. ?).006. ?'.11

9. ?0.1'

*. =ester 6ompany reported the following information for the year ended 9ecember 31, 2014>

@et income ? 1,000,000$referred dividends declared and paid 1)0,0006ommon dividends declared and paid -0,000#verage common shares outstanding 100,0007nding maret price per share 3'

@et sales 3,100,000

=esters earnings per share for 2014 was

#. ?.405. ?10.006. ?*.'09. ?31.00


*-. %F&! content in the income statement is similar to .!. "##$ in all of the following areas exceptthedisclosure of#. revenues5. finance costs6. e+traordinary items9. ta+ e+pense

0. 9ifferences that currently e+ist between %F&! and .!. "##$ with regard to the presentation ofinformation on the income statement include all of the following except#. different acceptable terminology relating to revenue items5. depreciation measures differ when euipment has been revalued6. different performance measures such as 75%T9# are permitted under %F&!9. differences resulting because %F&! does not reuire the use of accrual accounting under the historical costframewor

1. %F&! reporting reuires all of the following items except#. earnings per share disclosure5. comprehensive income disclosure in a statement of shareholders euity6. disclosure of the results of discontinued operations9. operating e+penses disclosure

2. 6omprehensive income is an important concept in accounting because it represents#. all changes in euity5. changes in euity from nonowner sources

6. changes in liabilities minus assets9. the impact on euity of all transactions

3. 6omprehensive income includes the following changes in euity in a company during a period except#. transactions with nonowners5. events relating to nonowner sources6. circumstances relating to nonowner sources9. distributions to owners

4. 6omprehensive income consists of#. operating income < other income and losses5. net income < other ad/ustments to retained earnings6. net income < other comprehensive income9. other comprehensive income < unreali(ed changes in the value of availableforsale securities


'. hich of the following is notpart of other comprehensive income8#. unreali(ed changes in the value of trading securities5. certain pension plan gains, losses, and prior service cost ad/ustments6. certain gains and losses in derivatives9. currency translation ad/ustments

). hich of the following is notconsidered part of comprehensive income8#. translation ad/ustments from financial statement conversions5. gains and losses on derivative financial instruments6. gains and losses associated with the sale of a business component9. gain and losses associated with ad/ustments to pension plan assets and liabilities

*. hich of the following is included in comprehensive income8#. gains and losses associated with derivative financial instruments that hedge future cash flows5. translation ad/ustments from converting foreign statements into .!. dollars

6. unreali(ed gains or losses associated with fair value of availableforsale securities9. all of these

. hen is a company notreuired to report comprehensive income8#. when it has a net operating loss5. when it has no other comprehensive income items6. when it has no e+traordinary items9. when it has no prior period ad/ustments

-. hich of the following is an acceptable way of reporting a company;s comprehensive income8#. on the face of the income statement5. in a separate, consecutive, statement of comprehensive income6. in the statement of changes in shareholders; euity9. both a and b are acceptable

-0. The primary purpose of a company;s statement of cash flows is to provide information about the company

#. operations5. dividend policy6. financing and investing activities9. cash receipts and cash payments during the period


-1. The statement of cash flows is least liely to help e+ternal users assess#. a company;s ability to generate positive future cash flows5. the amount of a company;s future accrualbased sales revenue6. a company;s ability to meet its obligations and pay dividends9. a company;s need for e+ternal financing

-2. hich of the following sections will notappear in the statement of cash flows8#. operating activities5. investing activities6. financing activities9. selling activities

-3. hich of the following events would be classified as an operating activity in a statement of cash flows8#. receipt of cash dividend on an euity investment5. sale of a longterm investment

6. issuing notes payable9. payment of cash dividends

-4. hich of the following events would be classified as an investing activity on a statement of cash flows8#. payment of interest on a loan5. receipt of cash dividends on an availableforsale investment6. purchase of inventory9. sale of an office building at a gain

-'. %n a statement of cash flows, the payment of a cash dividend on preferred stoc outstanding should beclassified as cash outflows for#. operating activities5. investing activities6. lending activities9. financing activities

-). %n a statement of cash flows, which of the following events would be classified as a financing activity8#. purchase of a trading security5. payment of interest on a loan6. payment of cash dividends to shareholders9. all of these


-*. hich of the following statements regarding a statement of cash flows isfalse8#. The most common method for reporting operating activities is the direct method.5. :perating activities include all transactions and other events related to the earnings process.6. %t reuires a reconciliation of beginning and ending cash balances.9. %t helps users assess a company;s need for e+ternal financing.

-. Financial fle+ibility is generally defined as#. the ability of a company to adapt to une+pected needs and opportunities5. the uncertainty or unpredictability of the future results of a company6. a measure of overall company performance9. a company;s ability to maintain a given level of operations

--. hich ratios are the most commonly analy(ed from the income statement8#. gross profit margin5. net profit margin

6. operating profit margin9. all of these

100. Exhibit 5-2

The following is an income statement from the financial records of $eace, =ove and Doy 6ompany for the yeaended 9ecember 31, 201'>

Income Statement

!ales AnetB ? 24',)*'

6ost of "oods !old A)*,'00B

"ross $rofit ? 1*,1*'

:perating e+penses 12',000B

:perating %ncome ? '3,1*'


%nterest e+pense A,*'0B

%ncome before ta+es ? '0,02'

%ncome ta+ e+pense A1',00B

@et %ncome ? 3',01

&efer to 7+hibit '2. 6ompute the gross profit margin for $eace, =ove, and Doy 6ompany. #. '05. 13*6. *2.'9. 2.3


101. Exhibit 5-2


Income Statement


6ost of "oods !old A)*,'00B"ross $rofit ? 1*,1*'







@et %ncome ? 3',01

&efer to 7+hibit '2. 6ompute operating margin for $eace, =ove, and Doy 6ompany.

#. 1.005. 2'.006. 20.)49. 21.)4

102. Exhibit 5-2


Income Statement


6ost of "oods !old A)*,'00B

"ross $rofit ? 1*,1*'







@et %ncome ? 3',01

&efer to 7+hibit '2. 6ompute net profit margin for $eace, =ove, and Doy 6ompany. #. 14.2'5. 1'.006. 2'.009. 13.2'


103. Exhibit 5-2


Income Statement


6ost of "oods !old A)*,'00B"ross $rofit ? 1*,1*'







@et %ncome ? 3',01

&efer to 7+hibit '2. 6ompute earningsbased interest coverage for $eace, =ove, and Doy 6ompany.

#. '.05. ).6. ).09. ).0

104. hich is the most commonly computed coverage ratio8#. debt ratio5. interest coverage ratio6. return on common euity9. net profit margin

10'. #n operating segment is a component of a company#. that engages in business activities to earn revenues and incur e+penses5. whose operating results are regularly reviewed by the company;s chief operating officer for budgeting andevaluation purposes6. for which financial information is available9. all of these

10). #n operating segment is a component of a company that does all of the following except#. has financial information available5. engages in business activities to earn revenues and incur e+penses6. is part of a publicly held company9. has operating results that are regularly reviewed by the company;s chief operating officer


10*. #n operating segment is a reportable segment if it#. satisfies the revenue, profit, and asset tests5. satisfies the revenue, profit, or asset tests6. operates predominately within a single industry9. satisfies the net income test

10. #n operating segment is significant and reportable if it satisfies at least one of three tests. hich of thefollowing is notone of those three tests8#. profit test5. revenue test6. asset test9. ratio test

10-. nder "##$ for segment reporting, a company must report#. a measure of profit or loss for each reportable segment

5. factors used to identify its reportable segments6. the types of products and services from which each reporting segment derives its revenues9. all of these

110. %nformation reported or disclosed about the profit or loss of reportable segments consists of#. a measure of operating profit or loss5. segment revenues Aseparated into sales to e+ternal customers and intersegment salesB6. interest revenue and interest e+pense9. all of these

111. hich of the following is nottrue about interim financial statements8#. %nterim financial statements are issued by all publicly held companies.5. "##$ must be applied to the interim financial statements.6. 7ach interim period is viewed as an integral part of an annual period.9. %nterim financial statements are not issued by all publicly held companies.

112. 7+penses that affect the operating activities of more than one interim period are allocated among theperiods based on an estimate of#. time e+pired5. benefit received6. activity associated with the periods9. all of these


113. The following information relates to Jhulu 6orporation Ain thousandsB>

!ales revenue ?1,1-0@et assets, end of year 1*0@et income, capital maintenance method 12'#dditional investment by shareholders 11'

@et assets, beginning of year 13'

Reqired!

6ompute the amount of dividends paid during the year, using the financial capital maintenance approach.

114. The following information relates to $eter 6ompany Ain thousandsB>

#dditional investment by Cr. $eter ? 1'!ales revenue 1'0

@et assets, beginning of year 1,1009istribution to Cr. $eter 1106ost of goods sold 12'

@et assets, end of year 1,10

Reqired!

6ompute net income, using the capital maintenance approach.

11'. =isted below are the three e+pense recognition principles followed by a series of e+pense items.

a. association of cause and effectb. systematic and rational allocationc. immediate recognition

KKKK 1. #morti(ation

KKKK 2. !ales commissions


KKKK 3. 6ost of goods sold

KKKK 4. #dministrative salaries

KKKK '. #llocation of prepaid insurance

KKKK ). tilities

KKKK *. $roduct warranty costs

KKKK . 9epreciation

KKKK -. Transportationout

KKKK 10. Travel and entertainment

Reqired!

Catch the e+pense recognition principles to their corresponding e+penses by placing the appropriate letter in the space provided.

11). The following income statement information for 2014 and 201' was obtained from the accounting recorof pperco 6ompany.

2014 201'!ales ?200,000 ?1'0,0005eginning inventory AaB KKKKKK AeB KKKKKK $urchases AnetB 40,000 40,0007nding inventory 2',000 ',0006ost of goods sold AbB KKKKKK )0,000"ross profit )',000 AfB KKKKKK :perating e+penses AcB KKKKKK AgB KKKKKK

%ncome before income ta+es AdB KKKKKK 40,000%ncome ta+ e+pense A30B 14,100 AhB KKKKKK

@et income AlossB 32,-00 AiB KKKKKK


Reqired!

Fill in the blans for the missing data.

11*. The information for &oberts 6ompany is presented below>

6ost of goods sold ?30,000$urchases returns and allowances 1,'00!ales returns and allowances 3,*'0"ross profit 2',000!elling e+penses -,000

@et income 10,*'0Transportationin 1,2'0$urchases 3',0007nding inventory ,*-0

Reqired!

6ompute the following Aignore income ta+esB>

a. !alesb. 5eginning inventoryc. "eneral and administrative e+penses

11. The income statement information for 2014 and 201' of Lloe 6ompany is as follows>

2014 201'5eginning inventory ? '0,000 AdB KKKKKKK !ales 400,000 AeB KKKKKKK $urchases 300,000 ?4-0,000$urchases returns and allowances ',000 20,000


7nding inventory *0,000 '0,000!ales returns and allowances 10,000 20,000"ross profit AaB KKKKKKK 100,0006ost of goods sold AbB KKKKKKK '00,000!elling e+penses 40,000 )0,000Transportationin ,000 10,000

"eneral and administrative e+penses '0,000 AfB KKKKKKK

@et income AcB KKKKKKK 20,000

Reqired!

Fill in the blans for the missing data. #ll the necessary information is listed.

11-. The information below is taen from the 9ecember 31, 2014 ad/usted trial balance of &ummer 6ompany

%nventory, 1I1I14 ?140,000!ales *00,000!elling e+penses 2',000

"eneral and administrative e+penses '0,000%nterest e+pense 1',000$urchases 330,000$urchases returns ',000!ales discounts taen 10,000Freightin *,'00=oss on sale of a ma/or component of the business Apreta+B 1',000

The inventory on 9ecember 31, 2014 was ?1)',000. The income ta+ rate is 30. There were 2',000 shares of common stoc outstanding throughthe year.

Reqired!

a. $repare a schedule of the cost of goods sold.b. $repare a 2014 income statement for &ummer 6ompany, using a multiplestep format Adisregard earnings per shareB.c. $repare a 2014 income statement for &ummer 6ompany, using a singlestep format Adisregard earnings per shareB.


120. Taylor 6orporation sold 9ivision C Aa business componentB. %t was determined that the preta+ loss fromthe operations of 9ivision C during the year totaled ?'0,000 and that a preta+ gain of ?12',000 was reali(ed the sale of the division. The ta+ rate is 3'.

Reqired!

%n good form, prepare the appropriate section of the income statement.

121. :n Cay 1, 2014, heaton 6ompany decided to dispose of its foreign sales operations Aconsidered a ma/class of customerB. The component was sold on @ovember 24, 2014, for ?1,000,000 resulting in a ?-),000 los

on the sale. The foreign sales operations recorded a ?300,000 operating profit in 2014 up to the date of sale.heaton 6ompany is sub/ect to a 30 income ta+ rate.

Reqired!

$repare the results from discontinued operations section of heaton 6ompany;s income statement for 2014.


122. :n :ctober 1, 2014, 6roatan 6orporation finali(ed its plans to discontinue operations of its retailcomponent. The plan calls for the sale of the retail operations to another company for ?*00,000 Acurrent fairvalueB on #pril l, 201'. The current boo value of the assets is ?00,000. For the first nine months of 2014, thcomponent incurred a preta+ operating income of ?)0,000. 9uring the last uarter of 2014, the preta+ incomewas ?10,000, while the e+pected preta+ income for the first uarter in 201' is e+pected to be ?20,000. 6roatais sub/ect to a 30 income ta+ rate.

Reqired!

$repare the results from discontinued operations section of 6roatan;s income statement for 2014, using good format. !how allcomputations.

123. 5a+ter, %nc., reported income from continuing operations Abefore ta+esB of ?'',000. %n addition, there waa ?1',000 loss from an unusual and infreuent flood. Ta+es of ?1),'00 A30B were paid.

Reqired!

$repare the bottom portion of the income statement.

124. 5elow are selected accounts taen from the ad/usted trial balance of !herris 9esigns on 9ecember 31,201'>

:perating e+penses ?1,000!ales revenue ',000Finished goods inventory, Dan. 1, 201' 1,)00$urchases 1,200%nterest revenue 2'07+traordinary loss Apreta+B 400Finished goods inventory, 9ec. 31, 201' *'0%ncome ta+ e+pense ))0


!herris 9esigns has 2,000 shares of common stoc outstanding and net income per share for 201' was ?0.)3. The income ta+ rate is 30.

Reqired!

a. $repare a singlestep income statement.b. $repare a multiplestep income statement.

12'. The following accounts are taen from the accounting records of 9ory 6ompany at 9ecember 31, 2013,after ad/ustments>

!ales revenue ?2'0,000!ales salaries e+pense 14,000#dministrative salaries e+pense 1',0009epreciation e+pense> euipment ,000$urchases 1)0,000!ales returns 1,000$urchases returns 2,000Freightin 10,000%nventory, 1I1I13 0,000&etained earnings, 1I1I13 )0,000

%n addition, the following information is available>

M The inventory on 9ecember 31, 2013, was ?*',000.M Ten thousand shares of common stoc were outstanding during the entire year. 9ory paid dividends of ?1.00 per share.M #t the end of :ctober, 9ory sold its unprofitable restaurant component. From Danuary through :ctober, the component had incurred

an operating loss Apreta+B of ?14,000. The sale was made at a loss Apreta+B of ?,000.M %n @ovember, the company sold the only land it ever owned for a gain of ?10,000.M The applicable ta+ rate is 30.

Reqired!

$repare a 2013 multiplestep income statement for the 9ory 6ompany.


12). !wiger Cusic 6ompany had the following information related to its financial statements>1B The company issued bonds in the amount of ?'0,000.2B 7arned net income of ?*,-00, declared a cash dividend of ?0.2' per share, currently there are '0,000 sharissued.3B &etained earnings at Danuary 1, 2014 was ?2,000.

Reqired!

$repare the reconciliation of retained earnings for 9ecember 31, 2014.

12*. %nformation from the accounts of "ause 6ompany is shown below>

!ales ?-,000,000$urchases ',000,000:perating e+penses 1,100,000"ain on sale of euipment 100,0007+traordinary loss due to earthuae Apreta+B 400,000"ain on sale of component 1,000,000:perating loss from disposed component 200,000Cerchandise inventory, 12I31I14 1,-00,000

The merchandise inventory on Danuary 1, 2014, was ?3,200,000. There were 2'0,000 shares of common stoc outstanding during the entire year.

Reqired!

#ssuming a 30 income ta+ rate, prepare a 2014 income statement for "ause 6ompany. se a multiplestep format.

12. 5elow is a list of terms>

1B KKKKKK 7+penses2B KKKKKK 7+traordinary items3B KKKKKK "ains4B KKKKKK %ncome from continuing operations'B KKKKKK =osses)B KKKKKK @et income*B KKKKKK :perating %ncomeB KKKKKK :ther comprehensive income items-B KKKKKK &evenues


Reqired!

Catch the appropriate term with the definition below.

aB %ncreases in assets or settlement of liabilities from delivering goods or producing goodsbB :utflows or using up assetscB :ther increases in euity resulting from transactions other than revenue producingdB 9ecreases in euityeB Top portion of the income statement

fB Cain body of the income statementgB 5ottom line of the income statementhB ith net income in a single continuous statementiB 5elow the discontinued operations results

12-. 5elow is the 6onsolidated !tatements of 7arnings Ain partB for !tarlights, %nc.

2"15 2"1# 2"1$

@et earnings attributable to !tarlights ? *' ? *2' ? )'0

7arnings per sharebasic AaB ? 1.0- AeB

7arnings per sharediluted ? 1.2' AcB ? 1.04

eighted average shares outstanding>

5asic )* AdB )'4

9iluted AbB )-3 AfB

6ash dividends declared per share ? 0.2' ? ?

Reqired!

6ompute the amounts for letters a through f.

130. #ccounting information might be separately reported in any of the following components of the incomestatement or statement of retained earnings and their supporting schedules and footnotes>

a. income from continuing operations or supporting schedulesb. e+traordinary gains or lossesc. disclosured. statement of retained earnings


e. results from discontinued operations

!everal items of accounting information are listed below.

KKKK 1. 7arthuae damage to the only silo owned by a company in Lansas, when the damage caused a material loss to thecompany

KKKK 2. =oss on sale by a highly diversified company of one of its four manufacturing plants

KKKK 3. 9ividends to shareholders declared by the corporation during the year

KKKK 4. :perating loss of the current period of a component sold late in the year

KKKK '. Total amount of cash paid to employees during the year

KKKK ). Total selling e+penses incurred by a producer of farm euipment during the year

Reqired!

5y placing the letters AaeB in the space provided above, identify where the information would be most appropriately reported. %f the information

would notappear in any of the above components, place an ANB in the space. %tems may be reported in more than one location.

131. 5elow is a list of financial statement components with a corresponding letter code.

a. !ales revenue AnetBb. 6ost of goods soldc. !elling e+pensesd. "eneral and administrative e+pensese. :ther revenue and e+pensesf. &esults from discontinued operationsg. 7+traordinary itemsh. $rior period ad/ustmentsi. #dditions to retained earnings Aother than hB

/. 9eductions from retained earnings Aother than hB. 9isclosuresl. 7nding balance sheet

KKKK 1. Cerchandise inventory AbeginningB

KKKK 2. 6ash dividends declared on common stoc

KKKK 3. Flood loss Ainfreuent and unusualB

KKKK 4. 7+penses incurred as a result of a strie

KKKK '. 9iscount on bonds payable

KKKK *. =oss from writeoff of a significant accounts receivable Afreuent, not unusualB

KKKK -. %nterest e+pense


KKKK 10. Transportationin

Reqired!

%ndicate where each component would be reported in the financial statements by inserting the corresponding code letters in the space provided.

132. 5radleys %nc.;s ad/usted trial balance contains the following account balances at 9ecember 31, 2014>

6ost of goods sold ?2'0,000

9epreciation e+pense *,000=oss on sale of euipment ',000&ent e+pense 12,000!ales 410,000!ales commissions 34,000!ales discounts 22,000nreali(ed decrease in value of available for sale securities 12,000

%ncome ta+es are 30 on all items, and there were 2,000 shares of common stoc outstanding during the year.

Reqired!

$repare a statement of comprehensive income.

133. :n 9ecember 31, 2014, Celissa 6ompany;s ad/usted trial balance contained the following accountbalances>

!ales AnetB ?1*',000:perating e+penses 1,000nreali(ed decrease in value of availableforsale securities 10,0006ost of goods sold 100,000

The income ta+ rate is 30, and the company had 2,000 shares of common stoc outstanding during the year.

Reqired!

a. $repare the income statement for the year 2014 that includes comprehensive income.


b. $repare the income statement for the year 2014 and a separate statement of comprehensive income.

134. The following are accounting items taen from the records of $aul 6ompany for 2013>

$ayment of dividends ? 4,000%ncrease in accounts payable ?1',000%ncrease in accounts receivable ?1-,0009ecrease in inventories ? ),0009ecrease in salaries payable ?14,000

@et income ?20,000$ayment for purchase of land and buildings ?)0,000%ssuance of tenyear bonds payable at par ?'0,0009epreciation e+pense ?10,000

Reqired!

$repare the net cash flow from operating activities section of $aul 6ompany;s 2013 statement of cash flows using the indirect method.

13'. The following are accounting items taen from the records of !terling 6ompany for 2014>

$ayment of dividends ?24,0009ecrease in accounts payable ?1-,0009ecrease in accounts receivable ?21,000%ncrease in inventories ? ),000%ncrease in salaries payable ?1,000

@et income ?42,000$ayment for purchase of land and buildings ?)0,000%ssuance of tenyear bonds payable at par ?20,0009epreciation e+pense ?10,000$roceeds from sale of patent rights ?2*,000


Reqired!

$repare the statement of cash flows for !terling 6ompany for 2014 using the indirect method.

13). The following items involve the cash flow activities of $ri((ie 6ompany for 2014>

@et income ?1)2,000$ayment of dividends ?2',0001,000 shares of stoc issued at ?20 par ?20,000#morti(ation e+pense on patents ? *,000$lant assets acuired at a cost of ?*',000#ccounts receivable increase of ? -,000#ccounts payable decrease of ?10,000!alaries payable increase of ? ),'005eginning cash balance ?1,000

Reqired!

$repare the statement of cash flows of $ri((ie 6ompany for 2014 using the indirect method.

13*. The following cash flows and other information pertain to 7lon 6ompany for 2014>

$roceeds from sale of stoc ?2',000 %nterest collected ? 2,'009ividends received 1,000 $ayments to suppliers 12,0009epreciation e+pense 1,'00 @et income 12,000

$roceeds from sale of euipment 1',000 9ecrease in inventory ,0006ollections from customers )',000 6ost of goods sold 4),000$ayments of interest 3,'00


Reqired!

$repare the operating activities section of the statement of cash flows for 2014, using the direct method.

13. For income reporting purposes, items can appear in any of the following components of the incomestatement, the statement of retained earnings, and related schedules and footnotes>

a. income from continuing operations or supporting schedulesb. e+traordinary gains or lossesc. results from discontinued operations

d. statement of comprehensive incomee. statement of retained earningsf. disclosure

!everal items of accounting information are listed below>

KKKK 2. !elling e+penses

KKKK 3. =oss on sale of plant assets

KKKK 4. nreali(ed losses due to maret value changes in availableforsale euity security investments

KKKK ). 6ash dividends declared on common stoc

KKKK *. nreali(ed gains due to foreign currency translation ad/ustments

KKKK . %nterest revenue

KKKK -. =oss on sale of a ma/or component of the business

KKKK 10. How a company defines cash and cash euivalents

Reqired!

5y placing the letters AafB in the spaces provided above, identify where the information would be most appropriately reported. %f the information

would notappear in any of the above components, place an ANB in the space.


13-. Tiger 6orporation presents the following condensed comparative income statement for2013, 2014, and 201'>

2"15 2"1# 2"1$

!ales AnetB ? '0,000 ? 4*,'00 ? 4',000

6ost of "oods !old A1*,000B A1',000B A13,000B

"ross $rofit ? 33,000 ? 32,'00 ? 32,000

:perating e+penses A1),000B A14,000B A12,'00B

%nterest revenue 2,000 1,00 1,'00

%nterest e+pense A1,'00B A1,*'0B A2,'00B%ncome before income ta+es ? 1*,'00 ? 1,''0 ? 1,'00

%ncome ta+ e+pense A',2'0B A',')'B A',''0B

@et %ncome ? 12,2'0 ? 12,-' ? 12,-'0

@umber of shares of common stoc 41,000 41,000 3-,'00

7arnings per share ? 0.30 ? 0.32 ? 0.33

Reqired!

$repare the rate of change analysis for Tiger 2014 and 201'.

140. 5elow are the income statement and balance sheet for =ily 6ompany>

Income Statement!ales AnetB ?1,2*',000

6ost of "oods !old A*)*,'00B

"ross $rofit ? '0*,'00

:perating e+penses A2)',000B

:perating %ncome ? 242,'00


%nterest e+pense A14,*00B

%ncome before ta+es ? 233,400

%ncome ta+ e+pense A*0,020B

@et %ncome ? 1)3,30

@umber of shares of common stoc 1'0,000

%alance Sheet

6ash ? 123,'00

&eceivables AnetB -),000

%nventory 113,4)0


Total #ssets ? '*,-)0

#ccounts $ayable ? 4',-00

:ther current liabilities 0,000

5onds $ayable 100,000

6ommon !toc 100,000

#dditional $aidin 6apital 100,000


&etained 7arnings 1)2,0)0

Total =iabilities O !hareholders 7uity ? '*,-)0

Reqired!

6ompute the following ratios>

1B "ross $rofit Cargin

2B :perating $rofit Cargin

3B @et $rofit Cargin

4B 6urrent &atio

'B 7arnings per !hare

141. =ist five purposes of the income statement.

142. The !76 reported that overstating revenue and recogni(ing revenue too soon was the culprit in more thahalf of the financial reporting frauds in the nited !tates. #s such Staff Accounting Bulletin No. 104providedadditional guidance on revenue recognition. %t emphasi(ed four criteria for revenue recognition. hat are thecriteria8


143. hat are the three e+pense recognition principles used to properly recogni(e e+pense either by matchingrevenues or matching periods8

144. hat are the seven ma/or components of a companys income statement8

14'. hat is the difference between interperiod ta+ allocation and intraperiod ta+ allocation8

14). hat criteria must be met in order for a company to classify a component as held for sale8


14*. =ist five items that the F#!5 specifically states cannot be considered e+traordinary.

14. hat are the four items of other comprehensive income under .!. "##$8

14-. How does the statement of cash flows help e+ternal users assess the overall health of a company when uin con/unction with the other financial statements8

1'0. hat three tests are used to evaluate an operating segment in order to determine if it is a reportablesegment8


1'1. %ncome measurement is a fundamental accounting concept, and yet the computation of periodic income caused the accounting profession some difficulty. 7conomists and accountants have long debated whatconstitutes income and how it should be measured. The capital maintenance method has been advocated asmeans of determining and measuring periodic income. 9iscuss the income concept.

1'2. The accounting profession has developed three alternatives for matching e+penses> association of causeand effect, systematic and rational allocation, and immediate recognition. 9iscuss the conceptual merits of eaalternative and give two e+amples for each e+pense matching alternative.

1'3. 9escribe the ma/or differences that still e+ist between the income statement information presentationreuirements under %F&! and "##$.

1'4. %n the preparation of interim income statements, the treatment of e+penses is recogni(ed differently

depending on whether or not they are directly related to product sales or services.

Reqired!

9iscuss the general treatment of e+penses in interim statements when they

a. are directly related to product sales or services.b. are notdirectly related to product sales or services.


6hapter 'The %ncome !tatement and the !tatement of 6ashFlows Ley

1. Together with the cash flow statement, the income statement enables the investors to determine the rate ofreturn the company is generating relative to the amount of capital invested.F&'SE

2. The income statement predicts a companys future income and cash flows.TR(E

3. The amount of money that can be distributed to shareholders as a return oncapital, without being a return ocapital, is the capital financial concept.F&'SE

4. .!. "##$ and %F&! companies commonly measure and report net income and comprehensive income.TR(E

'. &evenue can be recogni(ed either when it is earned or collection has occurred or reasonably certain to occuF&'SE

). !ystematic and rational allocation is used to recogni(e revenue.F&'SE

*. %f a company does not have any discontinued operations or e+traordinary items to list on its incomestatement, the labels should still be there with a (ero balance noted.F&'SE


. %nterperiod ta+ allocation involves apportioning a corporations total income ta+ e+pense for a period to thevarious components of its net income and other comprehensive income items.F&'SE

-. hen a parent company owns a ma/ority of the common shares of a subsidiary company but not 100 ofthem, the parent company will consolidate all of the subsidiarys revenues and e+penses into its financial

statements.TR(E

10. hen a company classifies a component as held for sale it must report the component on its balance sheethe lower of its boo value or its fair value minus costs to sell.TR(E

11. # company does nothave to disclose information about the sale of a discontinued component in the notesits financial statements until the actual sale has occurred.F&'SE

12. # terrorist attac would be considered an e+traordinary event because terrorist attacs are infreuent innature.F&'SE

13. To classify an event or transaction as e+traordinary it must be unusual in nature and infreuent inoccurrence.TR(E

14. There is no prescribed income statement format under %F&! whereas .!. "##$ reuires the use of thesinglestep or the multiplestep format.TR(E

1'. To compute earnings per share the denominator is net income attributable to common shareholders less anpreferred stoc dividends for the period.F&'SE


1). nder .!. "##$ or %F&!, a company can report its comprehensive income or loss under present netincome and comprehensive income in a single continuous performance statement or in a separate butconsecutive financial statement.TR(E

1*. "ains or losses associated with derivative financial instruments would be included in income from

continuing operations.F&'SE

1. The statement of cash flows provides e+ternal users the ability to analy(e the information reuired to accea companys ris, liuidity, financial fle+ibility, and operating capability.TR(E

1-. The most common way in which to prepare the statement of cash flows is the indirect method, which isencouraged by F#!5.F&'SE

20. 6ompanies with lower coverage ratios have a greater ris and a lower financial fle+ibility.TR(E

21. The !76 scrutini(es reported earnings numbers to assess the uality of earnings and to detect any potentifor earnings management.TR(E

22. # segment must pass all of the tests in order for it to be considered a reportable segment. These tests incluthe revenue, profit, and asset tests.F&'SE

23. # company is not reuired to follow a specific format in maing the disclosures for its segments but F#!5encourages the most useful format for its specific circumstances.TR(E


24. ho is the income statement designed to inform8#.creditors5.investors6.lenders)*all of these

2'. :perating capability refers to#.the ability of a company to adapt to une+pected needs and opportunities5.the uncertainty or unpredictability of the future results of a company6.a measure of overall company performance)*a company;s ability to maintain a given level of operations

2). The income statement helps users#.assess the companys ris5.review the impact of economic factors affecting the company

6.compare and contrast performance against a competitor)*all of these

2*. hich of the following is helpful to report separately8#.e+penses that vary with volume of activity5.e+penses that are discretionary6.e+penses that depend on other economic factors)*all of these

2. hich of the following is nota purpose of the income statement8#.used to evaluate managements performance%*predicts the companys future assets and liabilities6.used to compare performance against other companies9.assesses the companys ris

2-. The income statement is an important financial statement for all of the following reasons, except

#.the income statement helps shareholders evaluate management;s operating effectiveness5.past income statements can be useful indicators in predicting current and future cash dividend payments aswell as future stoc prices6.the income statement provides useful information concerning the corporation;s ability to generate sufficiencash flows from operations for use in payment of its operating obligations)*the income statement reports the amount of net cash inflows resulting from operating, financing, andinvesting activities to users


30. %n accrual accounting, net income is defined as#.&evenues 7+penses < "ains < =osses5.&evenues 7+pensesC*&evenues 7+penses < "ains =osses9.increase in net assets from nonowner transactions

31. The income statement reports#.revenue and e+penses for a given point in time.5.revenue and e+penses for a specific date.C*revenue, e+penses, gains and losses for a specified period of time.9.revenues, e+penses, gains and losses for a specific date.

32. 5elow is a list of account balances for Fraggle 6ompany>

6ash ? 123,'00

6ost of "oods !old *)*,'00

"ross $rofit '0*,'00

%ncome before ta+es 233,400

%ncome ta+ e+pense 8

%nterest e+pense 14,*00


%nventory 113,4)0

@et %ncome 8

@umber of 6ommon !hares 1'0,000

:perating e+penses 2)',000

:perating %ncome 242,'00


&eceivables AnetB -),000!ales AnetB 1,2*',000

hat is Fraggle 6ompanys net income, assuming a 30 ta+ rate8 &*?1)3,305.?233,4006.?242,'009.none of these

33. :n 9ecember 31, 2014, the net assets of Cartine( Canufacturing amounted to ?40,000. @et incomecalculated by using the financial capital maintenance concept amounted to ?12,000. 9uring the year, additioncommon stoc was issued for ?,000, and ?',000 of dividends was paid. The net assets at Danuary 1, 2014,amounted to#.?31,0005.?3*,0006.?20,000)*?2',000


34. "eorgio 6ompany began 2014 with net assets of ?0,000. @et income calculated by using the capitalmaintenance concept was ?21,000. 9uring 2014 owners contributed ?2),000 of new capital. 5y yearend, thenet assets totaled ?*,000. 9ividends to the owners during 2014 were&*?4-,0005.?2,0006.?23,0009.?2,000

3'. %n general, revenue is recogni(ed as being earned#.during the production process5.upon completion of the production process6.when cash is received)*when goods are sold or services are rendered

3). &eali(ation of revenue occurs when

#.the item is formally recorded and reported in the financial statements%*noncash resources are converted into cash or rights to cash6.the actual e+change of noncash resources into cash9.when a transaction is both reali(ed and reali(able

3*. To be recogni(ed as revenue, an item must#.meet the definition of earned revenue%*be earned revenue and be reali(ed or reali(able6.be reali(ed

9.be earned

3. :ne method of revenue recognition that postpones the recognition until after the time of sale is#.percentageofcompletion5.proportional performanceC*cost recovery9.point of sale

3-. hich of the following is notan e+pense recognition approach recogni(ed by the F#!5 as an e+penserecognition principle to properly match e+penses against revenues8#.immediate recognition5.systematic and rational allocationC*cash payment9.association of cause and effect


40. 7+amples of matching e+penses against revenues using the association of cause and effect include all of tfollowing except&*insurance costs5.transportation costs for delivery of goods to customers6.costs of products sold9.sales commissions

41. 9epreciation is an e+ample of which e+pense recognition principle8#.association of cause and effect%*systematic and rational allocation6.cost recovery9.immediate recognition

42. hich of the following e+penses is an e+ample of e+pense recognition under the immediate recognitionprinciple8

#.sales commissions5.depreciationC*management salaries9.transportationout

43. %n distinguishing between revenues and gains, which of the following statements isfalse8#.Core gains than revenues are beyond the entity;s control.5."ains are associated more with peripheral, nonoperating activities than are revenues.6."##$ does not provide precise distinctions between revenues and gains.

)*&evenues are reported net Arather than grossB more often than gains.

44. The ma/or components of the income statement are listed below>

# E e+traordinary items5 E income from continuing operations6 E earnings per share9 E results from discontinued operations

%n what seuence do they normally appear on the income statement8#.5#965.5#69C*59#69.5969


4'. hich of the following are components of the income statement8#.revenues5.e+traordinary items6.income from continuing operations)*all of these

4). hich of the following would appear after the heading of operating income8#.cost of goods sold5.other operating income items Agains or lossesB6.operating e+penses)*unusual and nonrecurring gains or losses

4*. hich of the following is nota component of the income statement8#.unusual and nonrecurring gains and losses5.net income

6.income ta+es)*accumulated other comprehensive income

4. The subtotal, gross profit, will be disclosed on&*a multiplestep income statement5.both multiplestep and singlestep income statements6.neither multiplestep nor singlestep income statements9.a singlestep income statement

4-. hich of the following is notused as a caption if there is nothing to report8#.income from continuing operations%*e+traordinary items6.interest e+pense9.income ta+es

'0. #ll of the following are included in the computation of cost of goods sold except&*freightout5.purchase returns and allowances6.beginning finished goods inventory9.freightin


'1. From the following information, compute cost of goods sold.

$urchase returns ? 1,200%nventory, 9ecember 31 2,'00Freightin 1,100%nventory, Danuary 1 2,00$urchases 1',000

#.?1',300%*?1',2006.?1',1009.?1',000

'2. #ll of the information reuired in the computation of cost of goods sold is presented below, e+cept forpurchases, which must be what amount8

$urchase returns ? 1,200%nventory, 9ecember 31 2,'006ost of goods sold 10,'00$urchases 8%nventory, Danuary 1 2,'00Freightin 1,'00

#.?10,005.?11,2006.?-,*00)*?10,200

'3. The gross profit of =arry 6ompany for 2014 is ?300,000, cost of goods manufactured is ?400,000, thebeginning inventories of goods in process and finished goods are ?2,000 and ?3',000, respectively, and theending inventories of goods in process and finished goods are ?'0,000 and ?*0,000, respectively. The cost ofgoods sold of =arry 6ompany for 2014 must have been#.?3*,0005.?2)',0006.?2*,000)*?3)',000


'4. %n 2014, 9allas 6ompany had sales of ?)00,000 cost of sales of ?430,000 interest e+pense of ?12,000 again on the sale of a component of ?'2,000 and an e+traordinary loss of ?2',000. For its income statement,9allas uses the singlestep format and the allinclusive concept. hat was 9allas;s reported preta+ income frocontinuing operations8#.?1'0,0005.?1*0,000C*?1',0009.?11,000

''. %ntraperiod ta+ allocation&*is used to allocate a company;s total income ta+ e+pense to the components of net income andcomprehensive income5.involves temporary AtimingB differences between financial and ta+able incomes6.reuires allocation of deferred ta+es across accounting periods9.results from differences between ta+ regulations and the principles followed to determine financial income

'). %ntraperiod ta+ allocation reuires a corporation;s total income ta+ e+pense to be allocated to all of thefollowing except#.e+traordinary items%*other revenues and e+penses6.discontinued operations9.priorperiod ad/ustments

'*. # company that discontinues and disposes of an operation AcomponentB should include the gain or loss on

sale in the income statement as aAnB#.priorperiod ad/ustment5.e+traordinary itemC*amount after income from continuing operations and before e+traordinary items9.bul sale of fi+ed assets included in income from continuing operations

'. hen an entity reports on a sale of a component of the business#.any income or loss from operations of the component should be reported in the income from continuingoperations section, but any gain or loss on the sale of the component should be presented below the income

from continuing operations section%*current operating income or loss of the component and any gain or loss on sale of the component should bpresented in a separate section of the income statement6.any gain or loss on the sale should always be presented in the e+traordinary gain or loss section of theincome statement9.all information related to the sold component should be reported solely in the footnotes accompanying thefinancial statements


'-. hich of the following is a reuired disclosure in the income statement when reporting the sale of acomponent of the business8#.The gain or loss on sale should be reported as an e+traordinary item.5.&esults of operations of a discontinued component should be disclosed immediately below e+traordinaryitems.C*7arnings per share from both income from continuing operations and net income should be disclosed on thface of the income statement.9.&evenue and e+penses applicable to the discontinued operations should be disclosed in the income

statement.

)0. hich is leastliely to be classified as a sale of a component8#.sale by a communications company of its radio stations, but none of its television stations5.sale by a food distributor of its wholesale supermaret division while maintaining its wholesale fastfoodrestaurants divisionC*sale by an apparel manufacturer of a woolen suit manufacturing plant in order to concentrate on themanufacture of suits from synthetic products9.sale by a meatpacing company of its AentireB 20 interest in a professional football team

)1. "regory 6ompany is disposing of a component of its company. The net loss from the sale is estimated to ?)00,000. %ncluded in the ?)00,000 is termination pay of ?100,000, which is directly associated with thedecision to dispose of the component and net losses from component asset writedowns of ?400,000. %gnorinta+es, "regory;s income statement should report a loss on sale of a business component of#.?100,0005.?400,0006.?'00,000)*?)00,000


2014 2013@et sales ?10,000,000 ?-,000,0006ost of sales ),000,000 ),000,000"ross profit ? 4,000,000 ?3,000,000

:perating e+pense 2,'00,000 2,000,000:perating income ? 1,'00,000 ?1,000,000"ain on sale of a component -00,000

? 2,400,000 ?1,000,000%ncome ta+ e+pense *20,000 300,000

@et income ? 1,)0,000 ? *00,000



2014 ?*00,000 loss


2013 ?400,000 loss


&efer to 7+hibit '1. %n the preparation of a revised comparative income statement, &anger should report income from continuing operations after

income ta+es for 2014 and 2013, respectively, amounting to#.?1,'40,000 and ?*00,000%*?1,'40,000 and ?-0,000

6.?1,)0,000 and ?*00,0009.?1,)0,000 and ?-0,000


2014 2013@et sales ?10,000,000 ?-,000,0006ost of sales ),000,000 ),000,000

"ross profit ? 4,000,000 ?3,000,000:perating e+pense 2,'00,000 2,000,000:perating income ? 1,'00,000 ?1,000,000"ain on sale of a component -00,000

? 2,400,000 ?1,000,000%ncome ta+ e+pense *20,000 300,000

@et income ? 1,)0,000 ? *00,000



2014 ?*00,000 loss

2013 ?400,000 loss


&efer to 7+hibit '1. %n the preparation of a revised comparative income statement, &anger should report under the caption G9iscontinued

:perationsG for 2014 and 2013, respectively,&*income of ?140,000 and a loss of ?20,0005.income of ?140,000 and a loss of ?06.income of ?200,000 and a loss of ?400,0009.a loss of ?*00,000 and a loss of ?400,000

)4. @elly 6ompany sold its cattle ranching component on Dune 30, 2014, for a gain of ?1,000,000. FromDanuary through Dune, the component had sustained operating income of ?300,000. The income ta+ rate is 3'How should @elly report the income and the sale on its income statement8#.as ?300,000 operating income and a ?1,000,000 gain on sale of component5.as a ?1,300,000 gain in operating income6.as a net of ta+ gain of ?4',000 after income from continuing operations)*as ?1-',000 operating income and a ?)'0,000 gain on sale of the component shown before e+traordinaryitems


)'. hich of the following is reuired to be disclosed, pursuant to "##$8#.operating income or loss from discontinued component reported on the income statement5.a description of facts and circumstances leading up to the sale of a discontinued component within the noteof the financial statements6.all gains or losses from sale of the component reported on the income statement or in the footnotes)*all of these

)). To be considered an e+traordinary item, an event must be#.unusual5.unusual or infreuent6.infreuent)*infreuent and unusual

)*. For an event or transaction to be classified as an e+traordinary item in the income statement, it should be#.infreuent and material, but it need not be unusual in nature

5.unusual in nature and material, but it need not be infreuentC*unusual in nature, infreuent, and material9.unusual in nature and infreuent, but it need not be material

). hich of the following material gainsIlosses would be disclosed as an e+traordinary item on an entity;sincome statement8#.a loss arising from the writeoff of a large uncollectible accounts receivable balance%*a loss arising from the e+propriation of a manufacturing plant by a foreign government6.a gain from the sale of a component of the entity;s business

9.a gain from the sale of manufacturing euipment no longer needed by the entity

)-. nder which of the following conditions would hurricane damage be considered an e+traordinary item forincome reporting purposes8&*only if hurricanes in the geographical area are unusual in nature and occur infreuently5.only if hurricanes are normal in the geographical area but do not occur freuently6.only if hurricanes occur freuently in the geographical area but can be covered by insurance policies9.under any circumstances hurricane damage should be classified as an e+traordinary item

*0. How should the gain or loss that is considered infreuent but not unusual in nature be disclosed8#.separately in the income statement immediately after income from continuing operations5.on a netofta+ basis in the income statement immediately after income from continuing operations6.as an e+traordinary item)*separately in the income statement as a component of income from continuing operations


*1. %n 2014, aler 6ompany wrote off a ?300,000 debt from a ma/or customer, lost ?2,2'0,000 when a forecountry devalued its currency, gained ?2,'00,000 when a manufacturing plant was destroyed by a unusual aninfreuent flood, lost ?)00,000 on the early retirement of its longterm bonds, and lost ?*',000 on the sale ofstoc from its investment portfolio. hat amount of e+traordinary items Abefore income ta+esB will alerreport in 20148#.?3*',0005.?)00,000C*?2,'00,000

9.?4,*'0,000

*2. aters 7dge 6ompany operates a manufacturing plant overlooing the 6hesapeae 5ay. %n early 201', ahurricane destroyed the uninsured plant, resulting in ?'00,000 damage. !uch damage had occurred previouslyonly once in the last 110 years. aters 7dges ?'00,000 loss should be reported on the income statement#.after ordinary income, but before e+traordinary items%*as an e+traordinary item6.as an ad/ustment to net income9.as a separate component of income from continuing operations

*3. How should a material, infreuent event not meeting the criteria for an e+traordinary item be disclosed inthe income statement8&*shown as a separate item in income from continuing operations5.shown in income from continuing operations but not shown as a separate item6.shown after income from continuing operations but before e+traordinary items9.shown after e+traordinary items net of income ta+ but before net income

*4. # review of the 9ecember 31, 2014, financial statements of &un 6orporation revealed that under the captiGe+traordinary losses,G &un reported a total of ?300,000. Further analysis revealed that the ?300,000 in lossescomprised the following items>

1. &un recorded a gain of ?0,000 incurred in the sale of euipment.2. %n an unusual and infreuent occurrence, a loss of ?3'0,000 was sustained as a result of tornado damage to a manufacturing facility.3. 9uring 2014, several factories were shut down during a ma/or strie by employees of &un;s ma/or customer. !hutdown e+penses

totaled ?1'0,000.4. %nventory in the amount of ?30,000 was written off as obsolete.

%gnoring income ta+es, what amount of loss should &un have reported as an e+traordinary loss on its 2014 income statement8 #.?1'0,000%*?3'0,0006.?20,0009.?'00,000


*'. 7arnings per share is an important disclosure because&*it provides information relevant to the common stocholders5.net income disclosed in the financial statements can fluctuate based upon management;s intentions6.it forces common and preferred stocholders to read the financial statements9.it uses net income

*). The numerator in the earnings per share calculation is#.only the amount available to common stocholders5.net income attributable to common shareholders6.net income minus declared preferred stoc dividends)*all of these

**. Corgan 6ompany reported the following information for the year ended 9ecember 31, 2014>

@et income ? )00,000$referred dividends declared and paid )0,0006ommon dividends declared and paid -0,000#verage common shares outstanding -0,0007nding maret price per share 4'

@et sales ',100,000

Corgans earnings per share for 2014 was#.?).)*%*?).006.?'.11

9.?0.1'

*. =ester 6ompany reported the following information for the year ended 9ecember 31, 2014>

@et income ? 1,000,000$referred dividends declared and paid 1)0,0006ommon dividends declared and paid -0,000#verage common shares outstanding 100,0007nding maret price per share 3'

@et sales 3,100,000

=esters earnings per share for 2014 was

&*?.405.?10.006.?*.'09.?31.00


*-. %F&! content in the income statement is similar to .!. "##$ in all of the following areas exceptthedisclosure of#.revenues5.finance costsC*e+traordinary items9.ta+ e+pense

0. 9ifferences that currently e+ist between %F&! and .!. "##$ with regard to the presentation ofinformation on the income statement include all of the following except#.different acceptable terminology relating to revenue items5.depreciation measures differ when euipment has been revalued6.different performance measures such as 75%T9# are permitted under %F&!)*differences resulting because %F&! does not reuire the use of accrual accounting under the historical costframewor

1. %F&! reporting reuires all of the following items except#.earnings per share disclosure%*comprehensive income disclosure in a statement of shareholders euity6.disclosure of the results of discontinued operations9.operating e+penses disclosure

2. 6omprehensive income is an important concept in accounting because it represents#.all changes in euity%*changes in euity from nonowner sources

6.changes in liabilities minus assets9.the impact on euity of all transactions

3. 6omprehensive income includes the following changes in euity in a company during a period except#.transactions with nonowners5.events relating to nonowner sources6.circumstances relating to nonowner sources)*distributions to owners

4. 6omprehensive income consists of#.operating income < other income and losses5.net income < other ad/ustments to retained earningsC*net income < other comprehensive income9.other comprehensive income < unreali(ed changes in the value of availableforsale securities


'. hich of the following is notpart of other comprehensive income8&*unreali(ed changes in the value of trading securities5.certain pension plan gains, losses, and prior service cost ad/ustments6.certain gains and losses in derivatives9.currency translation ad/ustments

). hich of the following is notconsidered part of comprehensive income8#.translation ad/ustments from financial statement conversions5.gains and losses on derivative financial instrumentsC*gains and losses associated with the sale of a business component9.gain and losses associated with ad/ustments to pension plan assets and liabilities

*. hich of the following is included in comprehensive income8#.gains and losses associated with derivative financial instruments that hedge future cash flows5.translation ad/ustments from converting foreign statements into .!. dollars

6.unreali(ed gains or losses associated with fair value of availableforsale securities)*all of these

. hen is a company notreuired to report comprehensive income8#.when it has a net operating loss%*when it has no other comprehensive income items6.when it has no e+traordinary items9.when it has no prior period ad/ustments

-. hich of the following is an acceptable way of reporting a company;s comprehensive i

chapter 5--the income state and the statement of cash flow

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