1.3 Income Statement and Statement of Comprehensive Income

Question 1

Income equation

Answer 1

Income (loss) = revenues + gains - expenses - losses

Question 2

Limitations of income statement

Answer 2

• Items of income and expense may be omitted from the income statement and reported on the statement of other comprehensive income
• Financial statements report accrual-basis results for the period
• Preparing the income statement requires estimates and management judgement

Question 3

Which one of the following would be shown on a multiple-step income statement but not on a single-step income statement?

A. Gross Profit
B. Loss from discontinued operations
C. Cost of goods sold
D. Net income from continuing operations

Answer 3

A. Gross profit

A single-step income statement combines all revenues and gains, combines all expenses and losses, and subtracts the latter from the former in a “single step” to arrive at net income. Gross profit, being the difference between sales revenue and cost of goods sold, does not appear on a single-step income statement.

Question 4

Equation to calculate COGS, for retailer

Answer 4

Beginning inventory + Net purchases + Freight-in = Goods available for sales

Goods available for sale - Ending inventory = COGS

Question 5

Equation to calculate COGM

Answer 5

Beginning direct materials inventory + purchase during the period - ending direct materials inventory = direct materials used in production

Direct materials used in production + direct labor costs + manufacturing overhead costs = total manufacturing costs

Total manufacturing costs + beginning WIP inventory - ending WIP inventory = COGM

Question 6

Equation to calculate COGS, with COGM

Answer 6

COGM + Beginning finished goods inventory - ending finished goods inventory = COGS

Question 7

COGS is recognized at the time of goods are sold, which follows the

Answer 7

matching principle

Question 8

Gross profit margin equation

Answer 8

Gross profit / sales

Question 9

The ________ income statement provides one grouping for revenue items and one for expense items

Answer 9

Single-step income statement

Question 10

The ________ income statement presents operating revenues and expenses in a section separate from nonoperating items

Answer 10

multiple-step income statement

Question 11

When an entity reports a discontinued operation, it must be presented in a separate section between

Answer 11

income from continuing operations and net income

Question 12

The profit and loss statement of an entity includes the following information for the current fiscal year:

*Sales: $160,000
*Gross profit: 48,000
*Year-end finished goods inventory: 58,300
*Opening finished goods inventory: 60,190

The cost of goods manufactured by the entity for the current fiscal year is

Answer 12

$110,110

The entity’s cost of goods manufactured can be calculated as follows:
Sales - Gross Profit + Ending finished goods - Beginning finished goods

Question 13

Given the following data for a company, what is the cost of goods sold?

• Beginning inventory of finished goods: $100,000
• Cost of goods manufactured: 700,000
• Ending inventory of finished goods: 200,000
• Beginning work-in-process inventory: 300,000
• Ending work-in-process inventory: 50,000

A. $500,000
B. $600,000
C. $800,000
D. $950,000

Answer 13

B. $600,000

Question 14

The major distinction made between the multiple-step and single-step income statement formats is the separation of

A. Operating and nonoperating data
B. Cost of goods sold expense and administrative expenses
C. Income tax expense and administrative expenses
D. The effect on income taxes due to extraordinary items and the effect on income taxes due to income before extraordinary items

Answer 14

A. Operating and nonoperating data

Within the income from continuing operations classification, the single-step income statement provides one grouping for revenue items and one for expense items. The single-step is the one subtraction necessary to arrive at income from continuing operations prior to the effect of income taxes. In contrast, the multiple-step income statement matches operating revenues and expenses separately from nonoperating items. This format emphasizes subtotals, such as gross profit or loss and operating income or loss, within the presentation of income from continuing operations.

Question 15

A company incurred $200,000 of manufacturing cost during the month, with a beginning finished goods inventory of $20,000 and an ending finished goods inventory of $15,000. Assuming no work-in-process inventories, the company’s cost of goods sold was

A. $105,000
B. $200,000
C. $220,000
D. $205,000

Answer 15

D. $205,000

Cost of goods sold = Beginning inventory + Cost of goods manufactured - ending inventory

Thus, cost of goods sold = $20,000 + $200,000 - $15,000 = $205,000

Question 16

A company reported first quarter revenues of $10,000,000, gross profit margin of 25%, and operating income of 15%. To reduce overhead expenses, a consultant recommends that the company outsource some of its operating activities beginning with the second quarter. This recommendation is anticipated to reduce operating expenses by 20% without affecting sales volume. The company has an income tax rate of 35%. Assuming cost of sales remains at 75%, what is the impact on the income statement if the company implements the recommendation?

A. Gross profit will increase by 8.0%
B. Operating income will increase by $200,000
C. Operating income will increase by 8.7%
D. Operating expenses will be reduced by $300,000

Answer 16

B. Operating income will increase by $200,000

Revenues: $10,000,000
COGS: (7,500,000)
Gross Profit: $2,500,000 ($10,000,000 x 25%)
Operating expenses: (1,000,000)
Operating income $1,500,000 (10,000,000 x 15%)

• COGS = Revenues - Gross profit
  ** Operating expense = Gross profit - Operating income

If operating expenses are reduced by 20%:
Gross profit: 2,500,000 (10,000,000 x 25%)
Operating expenses: (800,000) (1,000,000 x 80%)
Operating income: 1,700,000

Accordingly, a 20% reduction in operating expenses results in a $200,000 (1,700,000 - 1,500,000) increase in operating income.

Question 17

Which of the following are acceptable formats for reporting comprehensive income?

I. In one continuous financial statement
II. In a statement of changes in equity
III. In a separate statement of net income
IV. In two separate but consecutive financial statements

A. I and IV only
B. I, II, and III only
C. I and II only
D. III and IV only

Answer 17

A. I and IV only

If an entity that presents a full set of financial statements has items of other comprehensive income (OCI), it must present comprehensive income either (1) in a single continuous statement of comprehensive income or (2) in two separate but consecutive statements (an income statement and a statement of OCI).

Question 18

The following information was taken from last year’s accounting records of a manufacturing company.

Inventory:
Raw materials
* January 1: $38,000
* December 31: $45,000
Work-in-process
* January 1: 21,000
* December 31: 10,000
Finished goods
* January 1: 78,000
* December 31: 107,000

Other information
Direct labor: $236,000
Shipping costs on outgoing orders: 6,500
Factory rent: 59,000
Factory depreciation: 18,700
Advertising expense: 24,900
Net purchases of raw materials: 115,000
Corporate administrative salaries: 178,000
Material handling costs: 35,800

On the basis of this information, the company’s cost of goods manufactured and cost of goods sold are

A. $468,500 and $470,900, respectively
B. $460,500 and $489,500, respectively
C. $486,500 and $439,500, respectively
D. $646,500 and $617,500, respectively.

Answer 18

C. $486,500 and $439,500, respectively

Beginning raw materials $38,000 + Net purchases raw materials $115,000 = materials available $153,000

materials available $153,000 - ending materials 45,000 = materials used in production $108000

materials used in production $108,000 + direct labor 236,000 + Manufacturing overhead 113,500 (factory rent 59,000 + factory depreciation 18,700 + material handling costs 35,800) = total manufacturing costs 457,500

Total manufacturing costs 457,500 + beginning work in process 21,000 - ending work in process 10,000 = cost of goods manufactured 468,500

COGM 468,500 + beginning finished goods 78,000 - ending finished goods 107,000 = cost of goods sold 439,500.

Question 19

The financial statement that provides a summary of the firm’s operations for a period of time is the

A. Statement of financial position
B. Statement of shareholders’ equity
C. Income statement
D. Statement of retained earnings

Answer 19

C. Income statement

The results of operations for a period of time are reported in the income statement (statement of earnings) on the accrual basis using an approach oriented to historical transactions.