Chapter 4 Flashcards
A company reports the following amounts at the end of the current year. Under normal circumstances (ignoring tax effects). permanent earnings would be computed as:
Sales Revenue $860,000
Selling Expense $250,000
Gain on Sale of Investment $30,000
Interest Expense $10,000
Cost of Goods Sold $520,000
A. $90,000
B. $110,000
C. $80,000
D. $50,000
Answer: C. $80,000
Explanation: Sales Revenue - Selling Expense - Interest Expense - COGS = Permanent Earnings
Gain on Sale of Investment does not count as a permanent earnings
The Cansela baseball bat company reported income before taxes of $375,000. This amount includes a $75,000 loss on discontinued operations. The amount reported as income from continuing operations, assuming tax rate of 25% is:
A. $375,000
B. $337,500
C. $300,000
D. $225,000
B. $337,500
Explanation:
Income before tax = income from continuing operation+ income on discontinuing operations
$375,000 + $75.000 = $450,000
$450,000 - ($450,000 * 25%) = $337,500
On October 1, 1990 the American medical inc, adopted a plan to discontinue the generic drug division.
Operating loss for 1990 is: $195 million
Excess of book value over fair value, less cost to sell, at year end is: $25 million
In its income state before the year ended in 1990 American would report before taxes a loss of discontinued operations of
A. 170 Mill
B. 195 mill
C. 220 mill
D. all are inccorect
Answer: C. $220 Million
Explanation is $195 million discontinued + $25 million of book value = $220 Million
Which of the following represents a change in accounting principle?
A. Using a journal entry to correct misstatement in current financial statements?
B. Change in inventory cost method LIFO to average cost method.
C. Modifying the amount of bad debt expense in accounts receivables as new information on customer insolvency is obtained.
D. Correcting a material error in financial statements that have already been released to investors.
Answer: B. Change in inventory cost method LIFO to average cost method.
Which of the following in NOT an example of comprehension income?
A. Income from sales
B. Unrealized loss on securities available for sale
C. Foreign currency translation adjustment
D. Differed gains from derivatives
A. Income from sales
Most real-world income statements are presented using which format?
Multiple Choice
Magnitude-step
Income-step
Multiple-step
Single-step
multiple step
Popson Incorporated incurred a material loss that was unusual in character. This loss should be reported as a:
Multiple Choice
line item between income from continuing operations and income from discontinued operations.
line item in the retained earnings statement.
line item within income from continuing operations.
discontinued operation.
line item within income from continuing operations.
Provincial Incorporated reported the following before-tax income statement items:
Operating income $ 700,000
Nonoperating losses (100,000)
Provincial has a 25% income tax rate.
Provincial would report income tax expense as a separately stated line item in the income statement in the amount of:
Multiple Choice
$200,000.
$150,000.
$175,000.
$160,000.
$150,000
Explanation
($700,000 − $100,000) × 25% = $150,000
Temporary earnings are best characterized as earnings that:
Multiple Choice
do not conform to Generally Accepted Accounting Principles (GAAP).
do not have corresponding cash flows.
are from nonoperating activities.
arise from events that are not likely to recur in the foreseeable future.
arise from events that are not likely to recur in the foreseeable future.
Which of the following most likely would be classified as restructuring costs?
Multiple Choice
Acquisition fees associated with the purchase of land and buildings
Brokerage fees from the issuance of additional shares of stock
Advertising costs to sell a product recently developed by a company
Severance pay for employee layoffs associated with facility closings
Severance pay for employee layoffs associated with facility closings
Non-GAAP earnings:
Multiple Choice
are useful to compare two different firms’ performance.
are needed for the correction of errors.
are standardized under generally accepted accounting principles.
could be considered management’s view of permanent earnings.
could be considered management’s view of permanent earnings.
A common component of income excluded from the calculation of non-GAAP earnings is:
Multiple Choice
Interest expense.
Restructuring costs.
Cost of goods sold.
Income tax expense.
Restructuring costs.
The distinction between operating and nonoperating income relates to:
Multiple Choice
consistency of income stream.
continuity of income.
reliability of measurements.
primary activities of the reporting entity.
primary activities of the reporting entity.
A company reports the following amounts at the end of the current year:
Sales revenue $ 860,000
Selling expense 250,000
Gain on sale of investments 30,000
Interest expense 10,000
Cost of goods sold 520,000
Under normal circumstances (ignoring tax effects), permanent earnings would be computed as:
Multiple Choice
$90,000.
$110,000.
$50,000.
$80,000.
$80,000.
Explanation
$860,000 − $520,000 − $250,000 − $10,000 = $80,000
Which of the following is most likely to be classified as discontinued operations?
Multiple Choice
Sale of a small equity method investment in another company
Sale of a group of assets that represents a strategic shift in operations
Sale of undeveloped land due to lack of customer demand for additional store locations
All of the other answers would be classified as discontinued operations.
Sale of a group of assets that represents a strategic shift in operations
A company has decided to discontinue a component of its business and sells the component by the end of the year. The amount that the company would report as income from discontinued operations is (ignore tax effects):
Multiple Choice
income from operations for the year and either a gain or loss on the disposal of the component’s assets.
only the gain or loss on the disposal of the component’s assets.
income from operations for the year and only a loss on the disposal of the component’s assets.
only income from operations for the year.
income from operations for the year and either a gain or loss on the disposal of the component’s assets.
On August 1, 2024, Rocket Retailers adopted a plan to discontinue its catalog sales division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by June 30, 2025. On January 31, 2025, Rocket’s fiscal year-end, the following information relative to the discontinued division was accumulated:
Operating loss February 1, 2024–January 31, 2025 $ 115,000
Estimated operating losses, February 1–June 30, 2025 80,000
Impairment of division assets at January 31, 2025 10,000
In its income statement for the year ended January 31, 2025, Rocket would report a before-tax loss on discontinued operations of:
Multiple Choice
$(125,000).
$(65,000).
$(195,000).
$(115,000)
Explanation
$(115,000) + $(10,000) = $(125,000)
A change in accounting principle that is implemented using the modified retrospective approach includes:
Multiple Choice
implementing the change in the current period only and not adjusting for the cumulative effects on prior periods.
applying the new standard to the adoption period only, and recording the cumulative adjustment for prior periods to the current period’s beginning balance of retained earnings.
not accounting for the change in the current period or prior periods.
restating financial statements of all periods presented as if the new standard had been used in those periods.
applying the new standard to the adoption period only, and recording the cumulative adjustment for prior periods to the current period’s beginning balance of retained earnings.
Changes in estimates are accounted for using which approach?
Multiple Choice
Retrospective
Modified retrospective
Modified prospective
Prospective
Prospective
When a material error is discovered in prior financial statements:
Multiple Choice
prior financial statements are restated to their correct amounts.
assets and liabilities in the current period are restated to their appropriate levels.
prior income effects are adjusted to the current period’s beginning balance of retained earnings.
All of the other answer choices are correct.
All of the other answer choices are correct.
Each of the following would be reported as items of other comprehensive income except:
Multiple Choice
gain on projected pension benefit obligation.
deferred gain from derivatives.
foreign currency translation adjustment.
gain from the sale of equipment.
gain from the sale of equipment.
Schneider Incorporated had salaries payable of $60,000 and $90,000 at the end of 2023 and 2024, respectively. During 2024, Schneider recorded $620,000 in salaries expense in its income statement. Cash outflows for salaries in 2024 were:
Multiple Choice
$620,000.
$530,000.
$650,000.
$590,000.
Answer: $590,000
Explanation
$620,000 − $30,000 increase in salaries payable = $590,000
Rowdy’s Restaurants Cash Flow ($ in millions)
Cash received from:
Customers $ 1,800
Interest on investments 200
Sale of land 100
Sale of Rowdy’s common stock 600
Issuance of debt securities 2,000
Cash paid for:
Interest on debt $ 300
Income tax 80
Debt principal reduction 1,500
Purchase of equipment 4,000
Purchase of inventory 1,000
Dividends on common stock 200
Operating expenses 500
Rowdy’s would report net cash inflows (outflows) from investing activities in the amount of:
Multiple Choice
($1,900) million.
($4,000) million.
($3,900) million.
$100 million.
($3,900) million.
Explanation
Sale of land $ 100
Purchase of equipment (4,000)
Cash outflows from investing activities $ (3,900)
Canton Corporation reported the following items in its adjusted trial balance for the year ended December 31, 2024:
Income from continuing operations before income taxes $ 120,000
Gain on disposal of discontinued component 28,000
Loss from operations of discontinued component (60,000)
Canton is subject to a 25% tax rate.
Required:
Prepare the December 31, 2024, income statement for Canton Corporation, starting with income from continuing operations before income taxes.
Note: Amounts to be deducted should be indicated with a minus sign.
Explanation
Loss from operations of discontinued component = $(32,000)
(including gain on disposal of $28,000)
The trial balance of Plano Company included the following accounts as of December 31, 2024:
Debits Credits
Sales revenue $ 700,000
Interest revenue 60,000
Gain on sale of investments 110,000
Cost of goods sold $ 500,000
Selling expense 150,000
Interest expense 40,000
General and admin expense 100,000
Plano had 50,000 shares of stock outstanding throughout the year. Income tax expense has not yet been accrued. The effective tax rate is 25%.
Required:
Prepare a multiple-step income statement with earnings per share disclosure.
Note: Round earnings per share answer to 2 decimal places.
Missoula Incorporated reported the following selected financial statement data:
2023 2024
Cash $ 30,000 $ 32,000
Accounts receivable (net) 48,000 52,000
Inventory 58,000 72,000
Plant assets (net) 210,000 218,000
Total assets 405,000 395,000
Liabilities 145,000 145,000
Shareholders’ equity 260,000 250,000
Net sales 340,000 400,000
Cost of goods sold 220,000 280,000
Net income 20,000 25,000
Required:
Compute the receivables turnover ratio for 2024.
Explanation
$400,000 ÷ [($48,000 + $52,000) ÷ 2] = 8
Explanation
$400,000 ÷ [($48,000 + $52,000) ÷ 2] = 8
Divide Net Sales by AR
Missoula Incorporated reported the following selected financial statement data:
December 31, 2023 December 31, 2024
Cash $ 30,000 $ 32,000
Accounts receivable (net) 48,000 52,000
Inventory 68,000 72,000
Plant assets (net) 210,000 218,000
Total assets 405,000 395,000
Liabilities 145,000 145,000
Shareholders’ equity 260,000 250,000
Net sales 340,000 400,000
Cost of goods sold 220,000 280,000
Net income 20,000 25,000
Required:
Compute the asset turnover ratio for 2024.
Explanation
$400,000 ÷ [($405,000 + $395,000) ÷ 2] = 1
divide net sales by total assets
Missoula Incorporated reported the following selected financial statement data:
December 31, 2023 December 31, 2024
Cash $ 30,000 $ 32,000
Accounts receivable (net) 48,000 52,000
Inventory 68,000 72,000
Plant assets (net) 210,000 218,000
Total assets 405,000 395,000
Liabilities 145,000 145,000
Shareholders’ equity 260,000 250,000
Net sales 340,000 400,000
Cost of goods sold 220,000 280,000
Net income 20,000 25,000
Required:
Compute the inventory turnover ratio for 2024.
Explanation
$280,000 ÷ [($68,000 + $72,000) ÷ 2] = 4
Divide COGS by Inventory
Missoula Incorporated reported the following selected financial statement data:
December 31, 2023 December 31, 2024
Cash $ 30,000 $ 32,000
Accounts receivable (net) 48,000 52,000
Inventory 68,000 72,000
Plant assets (net) 210,000 218,000
Total assets 405,000 395,000
Liabilities 145,000 145,000
Shareholders’ equity 260,000 250,000
Net sales 340,000 400,000
Cost of goods sold 220,000 280,000
Net income 20,000 25,000
Required:
Compute the profit margin on sales for 2024.
Note: Round your answer to 2 decimal places.
Explanation
$25,000 ÷ $400,000 = 6.25%
divide the gross profit by the total revenue for the year and then multiply by 100
gross profit is the total revenue minus the cost of goods sold.
Missoula Incorporated reported the following selected financial statement data:
December 31, 2023 December 31, 2024
Cash $ 30,000 $ 32,000
Accounts receivable (net) 48,000 52,000
Inventory 68,000 72,000
Plant assets (net) 210,000 218,000
Total assets 405,000 395,000
Liabilities 145,000 145,000
Shareholders’ equity 260,000 250,000
Net sales 340,000 400,000
Cost of goods sold 220,000 280,000
Net income 20,000 25,000
Required:
Compute the average collection period for 2024.
Note: Round your answer to 1 decimal place.
Explanation
365 ÷ 8.0 (Accounts receivable turnover) = 45.6 days
Accounts receivable turnover $400,000 ÷ [($48,000 + $52,000) ÷ 2] = 8
365 days divided by AR turnover
Missoula Incorporated reported the following selected financial statement data:
December 31, 2023 December 31, 2024
Cash $ 30,000 $ 32,000
Accounts receivable (net) 48,000 52,000
Inventory 68,000 72,000
Plant assets (net) 210,000 218,000
Total assets 405,000 395,000
Liabilities 145,000 145,000
Shareholders’ equity 260,000 250,000
Net sales 340,000 400,000
Cost of goods sold 220,000 280,000
Net income 20,000 25,000
Required:
Compute the average days in inventory for 2024.
Note: Round your answer to 2 decimal places.
Answer: 91.25
Explanation
365 ÷ 4.0 (Inventory turnover) = 91.25 days
Inventory turnover $280,000 ÷ [($68,000 + $72,000) ÷ 2] = 4
Missoula Incorporated reported the following selected financial statement data:
December 31, 2023 December 31, 2024
Cash $ 30,000 $ 32,000
Accounts receivable (net) 48,000 52,000
Inventory 68,000 72,000
Plant assets (net) 210,000 218,000
Total assets 405,000 395,000
Liabilities 145,000 145,000
Shareholders’ equity 260,000 250,000
Net sales 340,000 400,000
Cost of goods sold 220,000 280,000
Net income 20,000 25,000
Required:
Compute the return on assets for 2024.
Note: Round your answer to 2 decimal places.
Answer: 6.25%
Explanation
$25,000 ÷ [($405,000 + $395,000) ÷ 2] = 6.25%
dividing a company’s net income by the average total assets
