Topic 1 (Chapter 4 TB)

Question 1

The income statement is useful for helping to assess the risk or uncertainty of achieving future cash flows.

Answer 1

TRUE

Question 2

A strength of the income statement as compared to the statement of financial position is that items that cannot be measured reliably can be reported in the income statement.

Answer 2

FALSE

Question 3

Earnings management generally makes income statement information more useful for predicting future earnings and cash flows

Answer 3

FALSE

Question 4

The transaction approach of income measurement focuses on the income-related activities that have occurred during the period

Answer 4

TRUE

Question 5

Income from operations represents a company’s results before any gain or loss on discontinued operations.

Answer 5

FALSE

Question 6

Both revenues and gains increase both net income and equity.

Answer 6

TRUE

Question 7

Companies frequently report income tax as the last item before net income on the income statement.

Answer 7

TRUE

Question 8

The income statement presents subtotals for gross profit, income before continuing operations, income before income tax, and net income.

Answer 8

FALSE

Question 9

The nature-of-expense method identifies the major cost drivers and helps users to assess whether these amounts are appropriate for the revenue generated.

Answer 9

FALSE. Function-of-expense method

Question 10

Income before income taxes is computed by deducting interest expense from income from operations.

Answer 10

TRUE

Question 11

The IASB takes the position that both revenues and expenses and other income and expense should be reported as part of income from operations.

Answer 11

TRUE

Question 12

Companies report the results of operations of a component of a business that will be disposed of separately from continuing operations.

Answer 12

TRUE

Question 13

Discontinued operations and gains and losses are both reported net of tax in the income statement.

Answer 13

FALSE

Question 14

A company that reports a discontinued operation has the option of reporting per share amounts for this item.

Answer 14

FALSE

Question 15

Intraperiod tax allocation relates the income tax expense of the period to the specific items that give rise to the amount of the tax provision.

Answer 15

TRUE

Question 16

A company recognizes a change in estimate by making a retrospective adjustment to the financial statements.

Answer 16

FALSE. Not retrospective but prospective.

Question 17

Prior period adjustments can either be added or subtracted in the Retained Earnings Statement.

Answer 17

TRUE

Question 18

Companies only restrict retained earnings to comply with contractual requirements or current necessity.

Answer 18

FALSE

Question 19

Comprehensive income includes all changes in equity during a period except those resulting from distributions to owners.

Answer 19

FALSE

Question 20

Comprehensive income can be reported in a statement of changes in equity.

Answer 20

TRUE

Question 21

The major elements of the income statement are
a. revenue, cost of goods sold, selling expenses, and general expense.
b. operating section, nonoperating section, discontinued operations and cumulative effect.
c. revenues, expenses, gains, and losses.
d. All of these.

Answer 21

revenues, expenses, gains, and losses.

Question 22

Information in the income statement helps users to
a. evaluate the past performance of the enterprise.
b. provide a basis for predicting future performance.
c. help assess the risk or uncertainty of achieving future cash flows.
d. All of these.

Answer 22

a. evaluate the past performance of the enterprise.
b. provide a basis for predicting future performance.
c. help assess the risk or uncertainty of achieving future cash flows.

Question 23

Limitations of the income statement include all of the following except
a. items that cannot be measured reliably are not reported.
b. only actual amounts are reported in determining net income.
c. income measurement involves judgment.
d. income numbers are affected by the accounting methods employed.

Answer 23

only actual amounts are reported in determining net income.

Question 24

Which of the following would represent the least likely use of an income statement prepared for a business enterprise?
a. Use by customers to determine a company’s ability to provide needed goods and services.
b. Use by labor unions to examine earnings closely as a basis for salary discussions.
c. Use by government agencies to formulate tax and economic policy.
d. Use by investors interested in the financial position of the entity.

Answer 24

Use by investors interested in the financial position of the entity.

Question 25

The income statement reveals
a. resources and equities of a firm at a point in time.
b. resources and equities of a firm for a period of time.
c. net earnings (net income) of a firm at a point in time.
d. net earnings (net income) of a firm for a period of time.

Answer 25

net earnings (net income) of a firm for a period of time.

Question 26

The income statement information would help in which of the following tasks?
a. Evaluate the liquidity of a company.
b. Evaluate the solvency of a company.
c. Estimate future cash flows.
d. Estimate future financial flexibility.

Answer 26

Estimate future cash flows.

Question 27

Which of the following is an example of managing earnings down?
a. Changing estimated bad debts from 3 percent to 2.5 percent of sales.
b. Revising the estimated life of equipment from 10 years to 8 years.
c. Not writing off obsolete inventory.
d. Reducing research and development expenditures.

Answer 27

Revising the estimated life of equipment from 10 years to 8 years.

Question 28

Which of the following is an example of managing earnings up?
a. Decreasing estimated salvage value of equipment.
b. Writing off obsolete inventory.
c. Underestimating warranty claims.
d. Accruing a contingent liability for an ongoing lawsuit.

Answer 28

Underestimating warranty claims.

Question 29

What might a manager do during the last quarter of a fiscal year if she wanted to improve current annual net income?
a. Increase research and development activities.
b. Relax credit policies for customers.
c. Delay shipments to customers until after the end of the fiscal year.
d. Delay purchases from suppliers until after the end of the fiscal year.

Answer 29

Relax credit policies for customers.

Question 30

What might a manager do during the last quarter of a fiscal year if she wanted to decrease current annual net income?
a. Delay shipments to customers until after the end of the fiscal year.
b. Relax credit policies for customers.
c. Pay suppliers all amounts owed.
d. Delay purchases from suppliers until after the end of the fiscal year.

Answer 30

Delay shipments to customers until after the end of the fiscal year.

Question 31

The income statement provides investors and creditors information that helps them predict
a. the amounts of future cash flows.
b. the timing of future cash flows.
c. the uncertainty of future cash flows.
d. All of these answers are correct.

Answer 31

a. the amounts of future cash flows.
b. the timing of future cash flows.
c. the uncertainty of future cash flows.

Question 32

Investors and creditors use income statement information for each of the following
except to
a. evaluate the future performance of the company.
b. provide a basis for predicting future performance.
c. help assess the risk and uncertainty of achieving future cash flows.
d. All of these answers are correct.

Answer 32

evaluate the future performance of the company.

Question 33

The planned timing of revenues, expenses, gains, and losses to smooth out bumps in earnings is the definition of
a. quality of earnings.
b. earnings management.
c. smoothing of earnings.
d. earnings averaging.

Answer 33

earnings management.

Question 34

Which of the following situations involving different accounting methods or accounting estimates results in comparison difficulties between companies?
a. Estimated useful lives for depreciable assets.
b. Inventory methods.
c. Estimates of bad debts.
d. All of the above.

Answer 34

a. Estimated useful lives for depreciable assets.
b. Inventory methods.
c. Estimates of bad debts.

Question 35

Which method of income measurement is used in the preparation of the income statement?
a. Capital maintenance approach.
b. Transaction approach.
c. Cash-flow approach.
d. Income components approach.

Answer 35

Transaction approach.

Question 36

Which of the following equations expresses the definition of “income”?
a. Income = Revenues – Expenses
b. Income = (Revenues + Gains) – (Expenses + Losses)
c. Income = Revenues + Gains
d. Income = Gains – Losses

Answer 36

Income = Revenues + Gains

Question 37

Which of the following is not required to be presented on the income statement under IFRS?
a. Revenue.
b. Other gains/losses.
c. Finance costs.
d. Tax expense.

Answer 37

Other gains/losses.

Question 38

The non-controlling interest section of the income statement is shown
a. below net income.
b. below income from operations.
c. above other income and expenses.
d. above income tax.

Answer 38

below net income.

Question 39

The definition of expenses includes
a. losses only.
b. expenses and losses.
c. expenses only.
d. expenses, losses and unrealized losses on available-for-sale securities.

Answer 39

expenses and losses.

Question 40

IFRS requires that a single amount be disclosed within the income statement for
a. the post-tax profit/loss on discontinued operations and the pre-tax gain/loss on the disposal of discontinued operational assets.
b. the pre-tax profit/loss on discontinued operations and the post-tax gain/loss on the disposal of discontinued operational assets.
c. the pre-tax profit/loss on discontinued operations and the pre-tax gain/loss on the disposal of discontinued operational assets.
d. the post-tax profit/loss on discontinued operations and the post-tax gain/loss on the disposal of discontinued operational assets.

Answer 40

the post-tax profit/loss on discontinued operations and the post-tax gain/loss on the disposal of discontinued operational assets.

Question 41

Which of the following is not a generally practiced method of presenting the income statement?
a. Including prior period adjustments in determining net income.
b. The condensed income statement.
c. The consolidated income statement.
d. Including gains and losses from discontinued operations of a component of a business in determining net income.

Answer 41

Including prior period adjustments in determining net income.

Question 42

The occurrence which most likely would have no effect on 2015 net income (assuming that all amounts involved are material) is the
a. sale in 2015 of an office building contributed by a stockholder in 1987.
b. collection in 2015 of a receivable from a customer whose account was written off in 2014 by a charge to the allowance account.
c. settlement based on litigation in 2015 of previously unrecognized damages from a serious accident which occurred in 2013.
d. worthlessness determined in 2015 of stock purchased on a speculative basis in 2011.

Answer 42

collection in 2015 of a receivable from a customer whose account was written off in 2014 by a charge to the allowance account.

Question 43

The occurrence that most likely would have no effect on 2015 net income is the
a. sale in 2015 of an office building contributed by a stockholder in 1966.
b. collection in 2015 of a dividend from an investment.
c. correction of an error in the financial statements of a prior period discovered subsequent to their issuance.
d. stock purchased in 2001 deemed worthless in 2015.

Answer 43

correction of an error in the financial statements of a prior period discovered subsequent to their issuance.

Question 44

Which of the following is not a selling expense?
a. Advertising expense.
b. Office salaries expense.
c. Freight-out.
d. Store supplies consumed.

Answer 44

Office salaries expense.

Question 45

The accountant for the Lintz Sales Company is preparing the income statement for 2015 and the statement of financial position at December 31, 2015. The January 1, 2015, merchandise inventory balance will appear
a. only as an asset on the statement of financial position.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement and as a current asset on the statement of financial position.
d. as an addition in the cost of goods sold section of the income statement and as a current asset on the statement of financial position.

Answer 45

only in the cost of goods sold section of the income statement.

Question 46

In which section of the income statement is interest expense reported?
a. Gross profit.
b. Income from operations.
c. Income before income taxes.
d. Non-controlling interest.

Answer 46

Income before income taxes.

Question 47

If a company prepares a consolidated income statement, IFRS requires that net income be reported for
a. the majority interest only.
b. the minority interest only.
c. both the majority interest and the minority interest.
d. as a single amount only.

Answer 47

both the majority interest and the minority interest.

Question 48

Earnings per share relate to
a. preference shares only.
b. ordinary shares only.
c. both preference and ordinary shares.
d. neither preference nor ordinary shares.

Answer 48

ordinary shares only.

Question 49

Undeclared dividends are deducted from net income in the earnings per share computation for which type of preference shares?
a. Non-cumulative only.
b. Cumulative only.
c. Neither non-cumulative nor cumulative.
d. Both non-cumulative and cumulative.

Answer 49

Cumulative only.

Question 50

The earnings per share computation is not required for
a. Net income.
b. Gain on disposal of discontinued operation, net of tax.
c. Income from continuing operations.
d. Income from operations.

Answer 50

Income from operations.

Question 51

Given the following income statement line items:
Income from operations
Income before income taxes
Income from continuing operations
Income from discontinued operations
Net income
How many earnings per share amounts are required to be disclosed?
a. 5
b. 4
c. 3
d. 2

Answer 51

3

Question 52

Which of the following earnings per share figures must be disclosed on the face of the income statement?
a. EPS for income before taxes.
b. The effect on EPS from unusual items.
c. EPS for gross profit.
d. EPS for income from continuing operations.

Answer 52

EPS for income from continuing operations.

Question 53

Earnings per share should always be shown separately for
a. net income and gross profit.
b. net income and pretax income.
c. income from continuing operations.
d. discontinued operations and prior period adjustments.

Answer 53

income from continuing operations.

Question 54

Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business?
a. The gain or loss on disposal should be reported as an other income item.
b. Results of operations of a discontinued component should be disclosed immediately below income from operations.
c. Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement.
d. The gain or loss on disposal should not be segregated, but should be reported together with the results of continuing operations.

Answer 54

Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement.

Question 55

When a company discontinues an operation and disposes of the discontinued operation (component), the transaction should be included in the income statement as a gain or loss on disposal reported as
a. a prior period adjustment.
b. an other income and expense item.
c. an amount after continuing operations and before net income.
d. a bulk sale of plant assets included in income from continuing operations.

Answer 55

an amount after continuing operations and before net income.

Question 56

Gains or losses on the disposal of investments should be shown in the income statement net of tax

Answer 56

FALSE

Question 57

Gains or losses on the disposal of investments should be disclosed separately

Answer 57

TRUE

Question 58

Income taxes are allocated to
a. continuing operations.
b. discontinued operations.
c. prior period adjustments.
d. All of these answers are correct.

Answer 58

a. continuing operations.
b. discontinued operations.
c. prior period adjustments.

Question 59

Which of the following is true about intraperiod tax allocation?
a. It arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return.
b. It is required for the cumulative effect of accounting changes but not for prior period adjustments.
c. Its purpose is to allocate income tax expense evenly over a number of accounting periods.
d. Its purpose is to relate the income tax expense to the items which affect the amount of tax.

Answer 59

Its purpose is to relate the income tax expense to the items which affect the amount of tax.

Question 60

Companies use intraperiod tax allocation for all of the following items except
a. discontinued operations.
b. prior period adjustments.
c. changes in accounting estimates.
d. income from continuing operations.

Answer 60

changes in accounting estimates.

Question 61

A change in accounting principle requires what kind of adjustment to the financial statements?
a. Current period adjustment.
b. Prospective adjustment.
c. Retrospective adjustment.
d. Current and prospective adjustment.

Answer 61

Retrospective adjustment.

Question 62

A change in accounting principle requires that the cumulative effect of the change for prior periods be shown as an adjustment to
a. beginning retained earnings for the earliest period presented.
b. net income for the period in which the change occurred.
c. comprehensive income for the earliest period presented.
d. stockholders’ equity for the period in which the change occurred.

Answer 62

beginning retained earnings for the earliest period presented.

Question 63

Changes in estimates affect reported amounts
a. retrospectively only.
b. prospectively only.
c. currently and prospectively.
d. currently and retrospectively.

Answer 63

currently and prospectively.

Question 64

Prior years income statements are not restated for
a. changes in accounting principle.
b. changes in estimates.
c. corrections of errors.
d. All of these answer choices are correct.

Answer 64

changes in estimates.

Question 65

In 2015, Milford Corporation determined that it overstated salaries payable and salaries expense by $20,000 in 2014. In 2015, which of the following accounts will have to be credited to correct this error?
a. Salaries and Wages Payable.
b. Salaries and Wages Expense.
c. Retained Earnings.
d. Income Summary.

Answer 65

Retained Earnings.

Question 66

Which of the following does not appear on a statement of retained earnings?
a. Net loss.
b. Prior period adjustments.
c. Preference share dividends.
d. Other comprehensive income.

Answer 66

Other comprehensive income.

Question 67

Which of the following would appear first in a statement of retained earnings?
a. Net income.
b. Prior period adjustment.
c. Cash dividends.
d. Share dividends.

Answer 67

Prior period adjustment.

Question 68

A correction of an error in prior periods’ income will be reported in the income statement

Answer 68

FALSE

Question 69

A correction of an error in prior periods’ income will be reported net of tax

Answer 69

TRUE

Question 70

Which of the following items will not appear in the retained earnings statement?
a. Net loss.
b. Prior period adjustment.
c. Discontinued operations.
d. Dividends.

Answer 70

Discontinued operations.

Question 71

Watts Corporation made a very large arithmetical error in the preparation of its year-end financial statements by improper placement of a decimal point in the calculation of depreciation. The error caused the net income to be reported at almost double the proper amount. Correction of the error when discovered in the next year should be treated as
a. an increase in depreciation expense for the year in which the error is discovered.
b. a component of income for the year in which the error is discovered, but separately listed on the income statement and fully explained in a note to the financial statements.
c. an other expense item for the year in which the error was made.
d. a prior period adjustment.

Answer 71

a prior period adjustment.

Question 72

Which of the following is included in comprehensive income?
a. Investments by owners.
b. Unrealized gains on non-trading equity securities.
c. Distributions to owners.
d. Changes in accounting principles.

Answer 72

Unrealized gains on non-trading equity securities.

Question 73

Which of the following is not an acceptable way of displaying the components of other comprehensive income?
a. Combined statement of retained earnings.
b. Second income statement.
c. Combined statement of comprehensive income.
d. All of the above are acceptable.

Answer 73

Combined statement of retained earnings.

Question 74

Comprehensive income includes all of the following except
a. dividend revenue.
b. losses on disposal of assets.
c. investments by owners.
d. unrealized holding gains.

Answer 74

investments by owners.

Question 75

Comprehensive income includes all of the following, except
a. revenues and gains.
b. expenses and losses.
c. preference share dividends.
d. unrealized gains and losses on non-trading equity securities.

Answer 75

preference share dividends.

Question 76

Under IFRS other comprehensive income must be displayed (reported) in
a. the equity section of the statement of financial position.
b. a second income statement.
c. the comprehensive income statement or the income statement and comprehensive income statement.
d. the retained earnings the statement.

Answer 76

a second income statement.