2.2 Factors Affecting Reported Profitability Flashcards
At the beginning of last year, a manufacturing company increased its selling price by $10 per unit. This price increase has no effect on the volume of sales. As a result, their operating profit margin will
A. Increase as a result of the price increase
B. Decline as a result of the price increase
C. Remain unchanged
D. Change as a result of the price increase, but the direction of such change cannot be determined
A. Increase as a result of the price increase
Which one of the following ratios would be most affected by miscellaneous or non-recurring income?
A. Net profit margin.
B. Operating profit margin.
C. Gross profit margin.
D. Debt-to-equity ratio.
A. Net profit margin.
Net profit margin is expressed as net income over sales. Net income would include miscellaneous or non-recurring income. This ratio would be the most affected because the amounts for miscellaneous or non-recurring income would be included in the numerator of the ratio.
A company bought a new machine and estimated that the machine will have a useful life of 10 years and a salvage value of $5,000. After the machine has been put in service for 2 years, the company has decided to change the estimate of the useful life to 7 years. Which one of the following statements describes the proper way to revise a useful life estimate?
A. Revisions in useful life are permitted only if approved by the SEC.
B. Retroactive changes must be made to correct previously recorded depreciation.
C. Only future years will be affected by the revision.
D. Both current and future years will be affected by the revision.
D. Both current and future years will be affected by the revision.
A change in useful life is accounted for in the current year by taking the current book value and dividing it by the new remaining useful life. This will change depreciation in the current and future years.
If gross profit margin has remained fairly constant for the past several years, which one of the following is the best explanation?
A. The cost of goods sold and sales have decreased by the same percentage.
B. The cost of goods sold and sales have decreased by the same dollar amount.
C. Net sales and net income have remained constant.
D. The cost of goods has remained steady.
A. The cost of goods sold and sales have decreased by the same percentage.
Gross profit margin is the percentage of gross revenues that remains with the firm after paying for merchandise. The key analysis with respect to the gross profit margin is whether it is keeping up with the increase or decrease in sales. For example, a 10% increase in sales should be accompanied by at least a 10% increase in the gross profit margin.
During the current year, an entity changed its method of accounting for depreciation because it believed that the result would provide more reliable and relevant information. In its financial statements for the year, how should the entity report the adjustment resulting from the change in accounting principle?
A. Report as an adjustment to beginning retained earnings of the earliest period presented in the financial statements.
B. Include in the determination of profit or loss for the current period as a cumulative effect adjustment.
C. Not disclose in the financial statements.
D. Disclose as a separate type of depreciation expense, directly following depreciation expense in the current year.
A. Report as an adjustment to beginning retained earnings of the earliest period presented in the financial statements.
When a change in accounting principle occurs, retrospective application, if practicable, is required for all direct effects and the related income tax effects of the change. Retrospective application requires that carrying amounts of assets, liabilities, and retained earnings at the beginning of the first period reported be adjusted for the cumulative effect of the new principle on all periods not reported.
Items reported as prior-period adjustments
A. Do not include the effect of a mistake in the application of accounting principles, as this is accounted for as a change in accounting principle rather than as a prior-period adjustments.
B. Are reflected as adjustments of the operating balance of the retained earnings of the earliest period presented.
C. Do not require further disclosure in the body of the financial statements.
D. Do not affect the presentation of prior period comparative financial statements.
B. Are reflected as adjustments of the operating balance of the retained earnings of the earliest period presented.
Prior-period adjustments are made for the correction of errors. The effects of errors on prior-period financial statements are reported as adjustments to beginning retained earnings for the earliest period presented in the retained earnings statement. Such errors do not affect the income statement for the current period.
