2.2 Statement of Income

Question 1

Nature of the Income Statement:

What type of accounts are income statement elements reported in?

Answer 1

nominal or temporary accounts

Question 2

Nature of the Income Statement:

Calculate net income or loss

Answer 2

Revenues - Expenses + Gains - Losses

Question 3

Nature of the Income Statement:

How are income statement accounts closed at the end of the period?

Answer 3

to permanent (real) balance sheet accounts

Question 4

Nature of the Income Statement:

How is income or loss closed at the end of the period?

Answer 4

closed to retained earnings

Question 5

Nature of the Income Statement:

Where are recognized amounts not included in continuing operations reported on the income statement?

Answer 5

separate section for discontinued operations

Question 6

Nature of the Income Statement:

When is the term “continuing operations” used?

Answer 6

only when a discontinued operation is reported

Question 7

Nature of the Income Statement:

Identify the 5 transactions not included in net income

Answer 7

1 - transactions with owners

2 - error corrections

3 - items reported initially in other comprehensive income

4 - transfers to and from appropriated retained earnings

5 - effects on prior periods of accounting changes

Question 8

Income Statement Format:

Identify the 3 formats of the income statement

Answer 8

1 - single step

2 - multiple step

3 - condensed

Question 9

Income Statement Format:

Define the single step income statement

Answer 9

• one subtraction necessary for net income

- provides one grouping for revenues and gains and one for expenses and losses

Question 10

Income Statement Format:

Define the multiple-step income statement

Answer 10

• matches operating revenues and expenses in a section separate from nonoperating items
• It enhances disclosure by presenting subtotals

Question 11

Income Statement Format:

Define the condensed income statement

Answer 11

• most common method of presentation
• includes only the section totals of the multiple-step format
• enhanced disclosure of each line item is presented in the notes to the financial statements

Question 12

Income Statement Sections:

Identify the 7 sections of the income statement

Answer 12

1 - cost of goods sold

2 - cost of goods manufactured

3 - selling expenses

4 - administrative (general) expenses

5 - interest expense

6 - items unusual, infrequent in nature or both

7 - discontinued operations

Question 13

Income Statement Sections:

Define cost of goods sold

Answer 13

equals purchases for a retailer or cost of goods manufactured (COGM) for a manufacturer, adjusted for the change in finished goods (FG) in inventory

Question 14

Income Statement Sections:

Calculate Cost of Goods Sold

Answer 14

Beginning FG Inventory
+ Purchases or COGM
- Ending Inventory
= Cost of Goods Sold

Question 15

Income Statement Sections:

Define cost of goods manufactured

Answer 15

• equals the period’s manufacturing costs adjusted for the change in work-in-process
• It also may be stated as cost of goods sold adjusted for the change in finished goods inventory

Question 16

Income Statement Sections:

Calculate cost of goods manufactured
HINT: (2)

Answer 16

Beginning WIP
+ Sum of periodic manufacturing costs
- Ending WIP
= Cost of goods manufactured

Ending FG inventory
+ Cost of goods sold
- Beginning FG inventory
= Cost of goods manufactured

Question 17

Income Statement Sections:

Provide examples of selling expenses

HINT (5)

Answer 17

1 - sales representatives salaries, commissions & traveling expenses

2 - sales department rent, salaries, and depreciation

3 - communications (internet) costs

4 - shipping costs

5 - advertising costs

Question 18

Income Statement Sections:

Provide examples of administrative (general) expenses

HINT: 6

Answer 18

1 - accounting, legal & other fees for professional services

2 - officers’ salaries

3 - insurance

4 - wages of office staff

5 - miscellaneous supplies

6 - office occupancy costs

Question 19

Income Statement Sections:

How is interest expense recognized?

Answer 19

as a passage of time

Question 20

Income Statement Sections:

How are material items reported that are unusual in nature, infrequent in occurrence or both?

Answer 20

• as a separate component of income from continuing operations
• must NOT be reported net of taxes
• Gains or losses of a similar nature that are not individually material must be aggregated
• nature & effect disclosed in notes to financial statements or in the income statement
• effects of such items on earnings per share must NOT be presented on the income statement

Question 21

Income Statement Sections:

How must an entity report discontinued operations?

Answer 21

it must be presented in a separate section AFTER income from continuing operations

Question 22

Income Statement Sections:

When is intraperiod tax allocation required?

Answer 22

when discontinued operations is reported

Question 23

Income Statement Sections:

Identify the categories income tax expense or benefit are allocated to during intraperiod tax allocation due to discontinued operations

HINT : 4

Answer 23

1 - continuing operations

2 - discontinued operations

3 - other comprehensive income

4 - items debited or credited directly to other components of equity

Question 24

Income Statement Sections:

Identify the 2 items reported separately in the discontinued operations section of the income statement

Answer 24

• Income or loss from operations of the component unit (including any gain or loss on disposal)
• Income tax expense or benefit

Question 25

Income Statement Sections:

Is EPS required to be disclosed for discontinued operations? If so, how is it to be reported?

Answer 25

• Yes, EPS must be disclosed on the face of the statement or in the notes