A310 Chapter 5

The statement of cash flows is least likely to help external users assess -a company's ability to generate positive future cash flows. -the amount of a company's future accrual-based sales revenue. -a company's ability to meet its obligations and pay dividends. -a company's need for external financing.

The amount of a company's future accrual-based sales revenue.

ABC Company has an after-tax net income of $20,000 and the income tax rate is 40%. During the year, ABC Company records a $6000 unrealized gain on its available-for-sale securities. What is ABC Company's Comprehensive Income for the year?

$20,000 + $6000*(1 - 40%) = $23,600

ABC Company reported total revenues of $100,000, a gross profit of $40,000, and operating expenses of $20,000. What are ABC Company's common size operating expenses?

$20,000/$100,000.

ABC Company has an income tax rate of 30% and has an unrealized gain on available-for-sale securities of $23,000 for the year. How would this be included in comprehensive income?

$23,000*(1 - 30%) = $16,100

Division X is a held-for-sale component unit of ABC Company. At year end, ABC Company calculated the expected pretax loss on Division X at $40,000. The journal entry at year end to record this loss would include

$40,000 Debit to Loss on Write-Down of Held-for-Sale Division X. (and a credit to the assets of Division X)

To provide relevant and faithfully represented information about financial performance and income to investors, lenders, and other creditors, the company must determine all of the following about the elements of the income statement except: -What: Identify the elements that must be recognized in income. -Why: Disclose the logic behind recognition of income elements. -When: Determine the timing of the recognition of income elements. -Where: Report (classify) the elements on the income statement.

-Why: Disclose the logic behind recognition of income elements.

ABC Company has a net profit margin of .11, a total asset turnover of 2, and leverage of 1.5. What is ABC Company's return of common equity?

0.11 X 2 X 1.5 = 0.33 or 33%.

The subtotal, gross profit, will be disclosed on

A multi-step income statement

Which of the following is not an expense recognition approach recognized by the FASB as an expense recognition principle to properly match expenses against revenues? -Immediate recognition -Systematic and rational allocation -Cash payment -Association of cause and effect

Cash payment

Which of the following statements is false? -All companies are required to report basic and diluted (if applicable) earnings per share amounts. -Earnings per share must be reported for income from continuing operations and net income. -Companies are not required to report earnings per share on any discontinued operations. -An EPS schedule is an acceptable way to disclose earnings per share information in the financial report.

Companies are not required to report earnings per share on any discontinued operations. (Companies ARE required to report EPS on any discontinued operations)

__________ and ____________ follow similar but not identical approaches to measuring and reporting net income. Both require disclosure of revenues, operating expenses, financing costs, tax expense, net income(loss), results of discontinue operations, and earnings per share.

GAAP & IFRS

Comprehensive income includes the following changes in equity of a company during a period except -transactions with nonowners. -events relating to nonowner sources. -circumstances relating to nonowner sources. -distribution to owners.

Distributions to owners

All of the following are purposes of the income statement except -evaluating the management of prior period cash flows. -assessing the company's financial performance over time. -predicting the company's future income potential. -understanding the components of income.

Evaluating the management of prior period cash flows.

Which of the following statements is false? -Risk is the uncertainty and variability of the future profitability of cash flows of a company. -Generally, the greater the risk, the lower the expected rate of return. -The income statement is useful for determining the risk associated with investing in or extending credit to the company. -The greater the uncertainty of future results, the greater the risk associated with an investment in or loan to the company.

Generally, the greater the risk, the lower the expected rate of return.

Which of the following statements is true? -U.S. GAAP requires a single-step format for the income statement. -U.S. GAAP requires a multiple-step format for the income statement. -U.S. GAAP does not have a prescribed income statement format. -IFRS does not have a prescribed income statement format.

IFRS does not have a prescribed income statement format.

The return on common equity integrates the bottom line of the _____ with the bottom line of the _____.

Income statement, balance sheet (The return on common equity ratio integrates the bottom line of the income statement (net income) with the bottom line of the balance sheet (the average amount of equity capital invested by the common shareholders).)

If a company's operating activities generate earnings amounts that are persistent and growing, investors and lenders can predict that the company is likely to continue to do so in the future. This typically means all of the following except -higher share values. -more favorable borrowing terms. -continued interest from current and future shareholders. -lower share values.

Lower share values

Which of the following is not a step when deciding whether a company should recognize revenue? -Identify the contract(s) with the customer. -Obtain the contract in writing. -Determine the transaction price. -Allocate the transaction price to the performance obligations in the contract.

Obtain the contract in writing (1) identify the contract(s) with the customer, 2)identify the performance obligations in the contract, 3)determine the transaction price, 4) allocate the transaction price to the performance obligations in the contract, 5) recognize revenue when (or as) the entity satisfies a performance obligation.)

A _________________ is a promise in the contract to transfer a good or service to the customer.

Performance obligation

Which of the following is false? -Retained earnings is the link between a corporation's income statement and its balance sheet. -Retained earnings is a component of shareholders' equity. -Retained earnings is the total amount of corporate earnings that has not been returned to shareholders through dividends. -Retained earnings include all income for the period as well as all dividends paid during the period.

Retained earnings include all income for the period as well as all DIVIDENDS DECLARED during the period

Which of the following sections will not appear in the statement of cash flows? -Operating activities -Investing activities -Financing activities -Selling activities

Selling activities

A company that discontinues and disposes of an operation (component) should include the gain or loss on sale in the income statement

directly after income from continuing operations.

The major components of the income statement appear in this sequence:

income from continuing operations, results from discontinued operations, net income, earnings per share.

The primary purpose of a statement of cash flows is to

provide relevant information about a company's cash receipts and cash payments during the period.

Net income is closed to _____________ and other comprehensive income is closed ______________.

retained earnings; accumulated other comprehensive income

All of the following conditions must be met to classifies a discontinued operation as held for sale at the end of the current accounting period except -the sale is probable in 3 months from balance sheet date. -management has begun an active program to locate a buyer. -the discontinued operation is being offered for sale at a price that is reasonable in relation to current fair value. -management has committed to a plan to sell and it is unlikely that management will make significant changes to the plan.

the sale is probable in 3 months from balance sheet date. (the correct answer is the sale is probable in a year from balance sheet date)