Chapter 4. The income statement, comprehensive income, and the statement of cash flow

Question 1

_________ represent the costs of providing goods & services

Answer 1

Expenses

Question 2

Which of the following items are classified as cash outflows from operating activities on the statement of cash flows
A) Retirement of common stock
B) purchase of supplies
C) interest paid on bonds
D) purchase of a building
E) Payment on account

Answer 2

B) purchase of supplies
C) interest paid on bonds
E) Payment on account

Question 3

Which of the following is an increase in equity that is not a direct result from operations but is from a peripheral or incidental transaction?
A) Revenue
B) gain
C) other comprehensive income
D) Loss

Answer 3

B) gain

Question 4

True or False Net income is a portion of comprehensive income

Answer 4

True

Question 5

The _______ ________ establishes a causal relationship between revenues and expense of the same period

Answer 5

Matching principle

Question 6

what is comprehensive income

Answer 6

is defined as the total change in equity for a reporting period other than transactions with owners.
Traditional net income plus other non-owner changes in equity

Question 7

An inflow of resources resulting from providing goods or services to customers is a ____________ _____________

Answer 7

Revenue Account

Question 8

Identify which items on an income statement are included in calculating income from continuing operations
A) Loss
B) interest expense
C) discontinued Operations
D) Revenue

Answer 8

A) Loss
B) interest expense
D) Revenue

Question 9

List the two items that are excluded from continuing operations on the income statement

Answer 9

Extraordinary items

Discontinued operations

Question 10

Pro forma earnings are
A) exclusively used for financial statement analysis
B) managements estimates and view of earnings
C) historical earnings for the previous 3 years
D) a good performance measure because they are audited

Answer 10

B) managements estimates and view of earnings

Question 11

The three types of accounting changes are a ________ a ________ and a ________

Answer 11

a change in accounting principle
a change in accounting estimate
a change in reporting entity

Question 12

When a component has been sold and qualifies for treatment as a discontinued operation, the reported income effects disclosed will include which of the following items?
A) operating income or loss from the date the decision was made to dispose of component
B) no effects from income, but gains from disposal of the component
C) Gain or loss on disposal of the components assets
D) operating income or loss of the component from the beginning of the reporting period to the disposal date

Answer 12

C) Gain or loss on disposal of the components assets

D) operating income or loss of the component from the beginning of the reporting period to the disposal date

Question 13

The cumulative total of other comprehensive income is reported as ______

Answer 13

accumulated other comprehensive income

Question 14

What are Extraordinary items

Answer 14

Material events and transactions that are both unusual in nature and infrequent in occurrence

Question 15

What are Discontinued operations

Answer 15

is a component that either (a) has been disposed of or (b) is classified as held for sale.
The cash flows must be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity

Question 16

An extraordinary item is a material event that is both
A) a result of a normal business risk
B) unusual in nature
C) a major loss from operations
D) infrequent in occurrence

Answer 16

B) unusual in nature

D) infrequent in occurrence

Question 17

The two approaches for preparing an income statement are ______ and ________

Answer 17

Single, multi-step

Question 18

Earnings quality refers to
A) the ability of reported earnings to predict future earnings
B) the strength of the regression model used to analyze earnings
C) the historical earnings of the company
D) the earnings score assigned by a financial analyst

Answer 18

A) the ability of reported earnings to predict future earnings

Question 19

Accumulated other comprehensive income represents
A) gains and losses reported in net income for the period
B) the change in retained earnings from net income of the period
C) extraordinary items reported in earnings of the period
D) the total of other comprehensive income to date

Answer 19

D) the total of other comprehensive income to date

Question 20

Comprehensive income includes net income as well as other ______ and _______ that change shareholders equity but are not included in traditional net income

Answer 20

Gains, Losses

Question 21

If a component of the business qualifies for discontinued operations treatment, which of the following statements are true.
A) The tax expense effect is removed from continuing operations
B) Revenue fro the discontinued operations is listed immediately below revenue in the operating section of the income statement
C) All revenues, expenses, gains, and losses must be removed from continuing operations
D) Revenues and expenses are reported in continuing operations but gains and losses are reported as discontinued operations

Answer 21

C) All revenues, expenses, gains, and losses must be removed from continuing operations

Question 22

A prior period adjustment requires an adjustment to
A) the ending balance of other comprehensive income
B) the income statement in the current year
C) the beginning balance of retained earnings
D) net income in the current year and future years

Answer 22

C) the beginning balance of retained earnings

Question 23

The formula for calculating an impairment of a discontinued operation held for sale is the _______ value of the component minus the _______ value of the component less costs to sell

Answer 23

Book, Fair

Question 24

Carol Corp has a component that is a discontinued operation. The revenues and expenses of the component were $100,000 and $160,000, respectively. The component was sold with a resulting gain of $200,000. The tax rate is 40%. What is the total gain or loss on discontinued operations (net of tax effects) that will be reported on the income statement

Answer 24

The loss from operating the component is $100,000 - $160,000 = (60,000). The loss from operating the discontinued operation is then netted against the gain on sale of the discontinued operations -$60,000 + $200,000 = $140,000. The gain net of tax is $140,000 x (1-0.40) = $84,000

Question 25

The accounting treatment required for a material error in financial statements that have been issued is to A) account for the change retrospectively in the financial statements B) account for the error prospectively in the financial statements C) correct the error in the current year and in future years D) restate the financial statements of the previous periods affected

Answer 25

D) restate the financial statements of the previous periods affected

Question 26

Prospectively

Answer 26

revising future years

Question 27

Retrospectively

Answer 27

revising prior years

Question 28

Net cash flos from financing activities represents the difference between the ______ and _________ of cash from financing activities

Answer 28

Inflows, Payments

Question 29

``` A change in accounting principle should be accounted for A) retrospectively B) regressively C) currently D) prospectively ```

Answer 29

A) retrospectively (prior years)

Question 30

Which of the following situations qualifies for treatment as a change in accounting principle A) change in inventory methods B) Change in revenue recognition methods C) Change from aging method to percent-of-credit sales metod for bad debts D) change to a new standard issued by the FASB

Answer 30

A) change in inventory methods B) Change in revenue recognition methods D) change to a new standard issued by the FASB

Question 31

Roger Corporation reports accumulated other comprehensie income of $10 million at 12/31/12. For the year ended 12/31/13, the company reports net income of $12 million and total comprehensive income of $15 million. On 12/31/13, Roger Corporation should report accumulated other comprehensive income of

Answer 31

13 million

Question 32

The type of tax allocation that associates income tax expense with each major component of revenue is referred to as ___________ tax allocation

Answer 32

intraperiod

Question 33

``` When a company changes from one acceptable accounting method to another, this is treated as a change in accounting A) estimate B) principle C) objectives D) entity ```

Answer 33

B) principle

Question 34

Which of the following information must be included in the notes to the financial statements regarding discontinued operations A) The major classes of assets and liabilities of the component B) The reason for the discontinuance C) The identity of the buyer of the component D) The identify of the component E) The number of employees affected by the discontinuance

Answer 34

A) The major classes of assets and liabilities of the component B) The reason for the discontinuance D) The identify of the component

Question 35

A change in depreciation method is accounted for by A) retrospectively restating the prior year financial statement B) prospectively applying the new method

Answer 35

B) prospectively applying the new method

Question 36

When a component classified as a discontinued operation is sold, what two elements are included in calculating the total gain or loss from discontinued operations displayed on the income statement A) Revenues and expenses of the component B) Extraordinary loss on the sale of the asset and the related tax benefit C) Net income and loss on disposal of the component D) operating income or loss for the period and gain or loss on disposal

Answer 36

D) operating income or loss for the period and gain or loss on disposal

Question 37

operating income includes

Answer 37

revenues and expenses directly related to the principal revenue-generating activities of the company

Question 38

non-operating income includes

Answer 38

gains and losses and revenues and expenses related to peripheral or incidental activities of the company

Question 39

Pro forma earnings are

Answer 39

actual (GAAP) earnings reduced by any expenses the reporting company feels are unusual and should be excluded

Question 40

Intraperiod tax allocation

Answer 40

Associates (allocates) income tax expenses (or income tax gross profit net sales benefit if there is a loss) with each major component of income that causes it.

Question 41

Other comprehensive income (OCI)

Answer 41

certain gains and losses that are excluded from the calculation of net income, but included in the calculation of comprehensive income

Question 42

Accumulated other comprehensive income (AOCI)

Answer 42

amount of other comprehensive income (non-owner changes in equity other than net income) accumulated over the current and prior periods

Question 43

Financial activities on statement of cash flow includes

Answer 43

cash inflows and outflows from transactions with creditors and owners

Question 44

Income statement includes the following main sections

Answer 44

1) Income from continuing operations 2) Separately reported items 3) Earnings per share

Question 45

Income from continuing operations includes

Answer 45

1) operating income (day to day) 2) Other income (Interest, gain,) 3) 1 + 2 = income from continuing operations before income taxes and extraordinary item 4) 3 - Income tax expenses = Income from continuing operations before extraordinary items

Question 46

Separately reported items includes

Answer 46

1) Discontinued operations (loss or gain) 2) Income tax benefit 3) = 1+2 = Loss on discontinued operations 4) Income from continuing operations before extraordinary items (D&E) - 3 = Net income

Question 47

Income statement includes the following main sections

Answer 47

1) Income from continuing operations 2) Separately reported items 3) Earnings per share

Question 48

Income from continuing operations includes

Answer 48

1) operating income (day to day) 2) Other income (Interest, gain,) 3) 1 + 2 = income from continuing operations before income taxes and extraordinary item 4) 3 - Income tax expenses = Income from continuing operations before extraordinary items

Question 49

Separately reported items includes

Answer 49

1) Discontinued operations (loss or gain) 2) Income tax benefit 3) = 1+2 = Loss on discontinued operations 4) Income from continuing operations before extraordinary items (D&E) - 3 = Net income