F1 M2 Income Statement and Balance Sheet

Question 1

Under US GAAP, a material transaction that is “infrequent in occurrence” and/or “unusual in nature” should be presented separately as a component of “income from continuing operations” when the transaction results in a ____.

Answer 1

Gain or loss

Question 2

Under US GAAP, a gain that is both unusual and infrequent should be reported as ____.

Answer 2

Income from continuing operations

Question 3

Where do “purchase discounts” go on the income statement?

Answer 3

They are a reduction in cost of goods sold (COGS)

Question 4

A company’s activities for Y2 included the following:
Gross sales $3,600,000
COGS $1,200,000
Selling and Admin Exps $500,000
Adjustment of prior-year understatement of amortization exp $59,000
Sales returns $34,000
Gain on sale of available-for-sale securities $8,000
Gain on disposal of a discontinued business segment $4,000
Unrealized gain on available-for-sale debt securities $2,000
The company has a 30% effective income tax rate. What is the company’s net income for Y2?

Answer 4

Gross sales
Less sales returns
Less COGS
Less selling and Admin exps
Plus gain on sale
Equals income from continuing operations $1,874,000
Less Income tax expense ($562,200)
Income before discontinued operations $1,311,800
Less gain on discontinued segment (after tax) $2,800
Equals Net Income of $1,314,600

Question 5

The income statement is useful for 3 things:

Answer 5

Determining profitability, value for investment purposes, and creditworthiness

Question 6

On the income statement, gains and losses are reported at their ____ value. This value is calculated by taking ______ less _____.

Answer 6

Net value

Process (selling price) less net book value

Question 7

The selling price and net book value would appear where on the income statement?

Answer 7

In the notes only

Question 8

Gains and losses are considered:

Operating or nonoperating

Answer 8

Nonoperating

Question 9

What are examples of gains and losses?

Answer 9

They are the sale of non-inventory items (not part of your core business), write-downs and write-offs, abandonment

Question 10

Income from continue operations is calculated by taking the sum of _____ and _____.

Answer 10

Sum of operating revenues and expenses and nonoperating gains and losses

Question 11

A multiple step income statement segregates _____ from _____.

Answer 11

Operating revenues and expenses from nonoperating revenues and expenses and other gains and losses.

Question 12

What is the first line on the multiple-step income statement?

Answer 12

Net sales

Question 13

What are the subtotals in the multiple-step income statement?

Answer 13

First, Gross Margin
Second, Income (loss) from operations - Normal operating
Third, Income before unusual items and income tax
Fourth, income before income tax
Lastly, Net income (or “income from continuing operations”)

Question 14

Where does interest expense go on the income statement?

Answer 14

Other expenses below operating income

Question 15

In a single-step income statement what do you do with your revenues? What do you do with your expenses and losses?

Answer 15

Total them

Total expenses including income tax expense are subtracted from total revenues

Question 16

What is the company's gross profit?
Net sales $500,000
Common stock $100,000
Insurance expense $75,000
Wages $50,000
Cost of goods sold $100,000
Cash $40,000
Accounts Payable $25,000
Interest Payable $20,000

Answer 16

Net sales - cost of goods sold = gross profit

$400,000

Question 17

What is the formula for calculating gross profit?

Answer 17

Net sales less cost of goods sold

Question 18

A classified balance sheet distinguishes _____.

Answer 18

Current and non-current assets and liabilities

Question 19

Current assets less current liabilities equals ____.

Answer 19

Working capital, helps to determine risk.

Question 20

The minimum operating cycle for purposes of reporting a “prepaid” current asset is _____.

Answer 20

One year

Question 21

The premium on a three-year insurance policy expiring on Dec 31, Year 3 was paid in total on Jan 2, Year 1. If the company has a six-month operating cycle, then on Dec 31, Year 1, the prepaid insurance reported as a current asset would be for:
A. 18 months
B. 12 months
C. 6 months
D. 24 months

Answer 21

B. 12 months

The key here is “current asset”

Question 22

A current liability is due ____.

Answer 22

In one year

Question 23

Discount on bonds payable is a _____ meaning that it lowers the liability.

Answer 23

Contra-liability

Question 24

At Oct 31, Dingo, Inc. had cash accounts at three different banks. One account balance is segregated solely for a Nov 15 payment into a bond sinking fund. A second account, used for branch operations is overdrawn. The third account, used for regular corporate operations, has a positive balance. How should these accounts be reported in Dingo’s Oct 31 classified balance sheet?

Answer 24

#1 is a noncurrent asset because it is used to pay a long-term sinking fund debt
#2 is a current liability
#3 is a current asset

Question 25

Accounts receivable is current or non-current?

Answer 25

Current

Question 26

Which of the following should be included in general and administrative expenses?
Interest
Advertising
Both
Neither

Answer 26

Neither

Interest is it’s own item and advertising is a selling expenses

Question 27

A separate disclosure is only necessary when the event is _____.

Answer 27

Uncommon

Question 28

“Freight in” is a part of _____. and “Freight out” is a part of _____.

Answer 28

Freight in is a part of COGS

Freight out is a part of selling expense