AC 305 Exam 2

The gain or loss from disposal of a component of a business is shown as a (an): A. part of discontinued operations. B. non-controlling interest. C. unusual gain or loss. D. prior period adjustment.

A

Earnings Management

The planned timing of revenues, expenses, gains, and losses to smooth out bumps in earnings. Also used to decrease current earnings in order to increase income in the future.

Limitations of the Income Statement

1. Companies omit items from the income statement that they cannot measure reliably. 2. Income numbers are affected by the accounting methods employed. 3. Income measurement involves judgement.

Three Points of Usefulness of the Income Statement

1. Evaluate the past performance of the company 2. Provide a basis for predicting future performance 3. Help assess the risk or uncertainty of achieving future cash flows.

An advantage of the nature-of-expense method under IFRS is that it A. is simple to apply. B. is viewed as more relevant. C. identifies the major cost drivers of the company. D. all of these answer choices are correct.

A

Gains and losses that bypass net income but affect stockholders' equity are referred to as: A. other comprehensive income. B. prior period adjustments. C. prior period income. D. unusual gains and losses.

A

Limitations of the income statement include all of the following except: A. It provides a basis for predicting future performance. B. Income numbers are affected by the accounting methods employed. C. Income measurement involves judgment. D. Companies omit items from the income statement that they cannot reliably measure.

A

Montana Company uses IFRS to prepare its financial statements. Montana's income statement lists the following expenses. Which of the following statements is correct regarding Montana's income statement? Supplies expense $4,000 Utilities expense $2,300 Entertainment expense $3,300 A. Montana is using the nature-of-expense approach. B. Montana has violated IFRS reporting standards. C. Montana is using the function-of-expense approach. D. Montana is using the general expense approach.

A

Non-controlling interest A. Is reported as a separate item below net income or loss. B. Is shown in a separate section of the income statement after continuing operations but before discontinued operations net of tax. C. Is shown in a separate section of the income statement after discontinued operations, net of tax. D. Is not shown on the face of the income statement.

A

Sawyer, Inc. consistently estimated its bad debt expense at 1 percent of credit sales. In 2017, however, Sawyer determines that it must revise upward the estimate of bad debts for the current year's credit sales to 2%, or double the prior years' percentage. Sawyer uses the revised estimate of 2% and calculates bad debt expense of $500,000. How is the change in the estimated bad debt expense reported in Sawyer's 2017 financial statements? A. $500,000 of expense in the income statement and $500,000 as a contra asset in the balance sheet. B. $500,000 of expense and $500,000 as an unusual loss in the income statement. C. $500,000 of expense in the income statement as an ordinary item, $500,000 of expense reported as an adjustment to the beginning balance of retained earnings (net of tax). D. $500,000 of expense reported as a change in accounting principle and accounted for under the retrospective approach.

A

The cumulative effect of a change in accounting principle should be recorded as an adjustment to retained earnings, when the change is: A. Completed-contract method of accounting for long-term construction-type contracts to the percentage-of-completion method. B. Straight-line method of depreciation for previously recorded assets to the double-declining-balance method. C. Cash basis of accounting for vacation pay to the accrual basis. D. Longer useful life of equipment to shorter useful life.

A

The major elements of the income statement are: A. revenues, expenses, gains, and losses. B. revenue, cost of goods sold, operating expenses, non-operating section. C. revenue, cost of goods sold, selling expenses, and general expense. D. operating section, non-operating section, discontinued operations, and extraordinary items.

A

Unusual and infrequent gains and losses A. include restructuring charges. B. are reported net of tax. C. include the elimination of a component of the business. D. include restructuring charges and are reported net of tax.

A

Which of the following is not classified as an unusual and infrequent gain or loss? A. A discontinued operation. B. Losses from inventory write-downs. C. Impairment losses on intangible assets. D. Flood damage losses to property.

A

Classification as an unusual item on the income statement would be appropriate for all of the following except: A. gain from condemnation settlement. B. gain or loss on disposal of a component of the business. C. substantial write-down of obsolete inventories. D. loss from a strike.

B

Earnings per share A. represents the dollar amount paid to stockholders in the form of dividends. B. measures the number of dollars earned by each share of common stock. C. can be reported either on the face of the income statement or in the notes to the financial statement. D. all of these answer choices are correct.

B

In the single-step income statement: A. expenses are classified by functions, such as merchandising, selling and administration B. just two groupings exist - revenues and expenses C. interest revenue and rental revenue are reported as other revenues and gains D. an income from operations figure is presented

B

What is the purpose of reporting comprehensive income? A. To provide information for each segment of the business. B. To summarize all changes in equity from non-owner sources. C. To reconcile the difference between net income and cash flows provided from operating activities. D. To provide a consolidation of the income of the firm's segments.

B

When a company transfers an amount of restricted retained earnings into a different account, that account is titled A. Unappropriated Retained Earnings. B. Appropriated Retained Earnings. C. Comprehensive Retained Earnings. D. Non-controlling Retained Earnings.

B

Which of the following is not explicitly discussed as part of income statement reporting under IFRS? A. Classifying expenses by nature. B. Single-step and multiple-step formats for the income statement. C. The identification of certain minimum items that should be presented on the income statement. D. All of these answer choices are correct.

B

Which of the following occur from peripheral or incidental transactions? A. Sales revenue. B. Gain on the sale of equipment. C. Operating expenses. D. Cost of goods sold.

B

Which of the following statements related to non-controlling interest is incorrect? A. Consolidated net income is allocated to the parent and to the non-controlling interest in proportion to their appropriate percentages of ownership. B. Non-controlling interest in net income is reported as an expense on the income statement. C. Non-controlling interest is sometimes called minority interest. D. Non-controlling interest is the portion of equity interest in a subsidiary not attributable to the parent company.

B

Which statement is correct regarding IFRS? A. IFRS requires use of the nature-of-expense approach. B. An advantage of the nature-of-expense method is that it is simple to apply because allocations of expense to different functions are not necessary. C. The function-of-expense approach never requires arbitrary allocations. D. An advantage of the function-of-expense method is that allocation of costs to the varying functions is rarely arbitrary.

B

A change in the method of inventory pricing from FIFO to LIFO would be accounted for as a (an): A. accounting error. B. change in estimate. C. change in accounting principle. D. part of discontinued operations.

C

Expenses include all of the following except: A. taxes. B. depreciation. C. dividends. D. cost of goods sold.

C

Josie Corporation reported the following information for 2017: Sales revenue $1,000,000 Cost of goods sold $700,000 Operating expenses $110,000 Unrealized holding gain on available-for-sale securities $40,000 Cash dividends received on the securities $4,000 For 2017, Josie would report comprehensive income of A. $40,000. B. $194,000. C. $234,000. D. $230,000.

C

Krista Company prepares a consolidated income statement that includes its subsidiary, Edward Co. Krista's income statement shows $23,500 of net income attributable to the non-controlling interest which is presented as A. a dividend. B. an expense. C. an allocation of net income. D. a gain attributable to the non-controlling interest.

C

The non-controlling interest section of the income statement is: A. required under GAAP but not under IFRS. B. not reported under GAAP or IFRS. C. required under IFRS and GAAP. D. required under IFRS but not under GAAP.

C

Which limitation of an income statement occurs when one company uses an accelerated depreciation method while another company uses straight-line depreciation? A. Companies omit from the income statement items they cannot measure reliably. B. Income measurement involves judgment. C. Income numbers are affected by the accounting methods employed. D. All of these answer choices are correct.

C

Which of the following is a component of other comprehensive income? A. Changes in market value of inventory. B. Unrealized gain or loss on trading securities. C. Cumulative currency-translation adjustments. D. Minimum accrual of vacation pay.

C

Which of the following would be reported as "other comprehensive income"? A. correction for understatement of net income in a prior period. B. loss on impairment of an intangible asset. C. unrealized holding gain on available-for-sale securities. D. gain from the sale of available-for-sale securities.

C

A multiple-step income statement A. highlights certain intermediate components of income that analysts use to compute ratios for assessing the performance of the company. B. separates operating transactions from non-operating transactions. C. matches costs and expenses with related revenues. D. all of these answer choices are correct.

D

Foy Corp. failed to accrue warranty costs of $50,000 in its December 31, 2003 financial statements. In addition, a change from straight-line to accelerated-depreciation made at the beginning of 2004 resulted in a $30,000 decrease in income for the year. Both the $50,000 and the $30,000 are net of related income taxes. What amount should Foy report as prior period adjustments in 2004? A. $30,000 B. $0 C. $80,000 D. $50,000

D

The single-step income statement emphasizes A. discontinued operations more than these are emphasized in the multiple-step income statement. B. the various components of income from continuing operations. C. the gross profit and income from operations. D. total revenues and total expenses.

D

Which of the following statements is correct regarding income reporting under IFRS? A. Companies must classify expenses by nature. B. IFRS provides a definition for all items presented in the income statement. C. IFRS does not permit revaluation of property, plant, and equipment, and intangible assets. D. IFRS provides the same options for reporting comprehensive income as GAAP.

D

Which of the following statements is incorrect? A. Under IFRS, companies must classify expenses by either nature or function. B. Both GAAP and IFRS follow the same presentation guidelines for discontinued operations but IFRS defines a discontinued operation more narrowly. C. Both GAAP and IFRS require companies to indicate the amount of net income attributable to non-controlling interest. D. GAAP identifies certain minimum items that should be presented on the income statement. IFRS has no minimum information requirements.

D

Increases in equity (net assets) from peripheral or incidental transactions of an entity except those that result from revenues or investments by owners.

Gains

Outflows or other using-up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations

Expenses

Discontinued operations occur when a company eliminates the results of operations of a component of the business. The elimination of the component need not represent a strategic shift, having a major effect on the company's operations and financial results.

False

Losses as a result of a strike are reported net of tax as a subdivision of non-controlling interest section.

False

The report that measures the success of company operations for a given period of time. Used to determine profitability, investment value, and creditworthiness.

Income Statement

Decreases in equity (net assets) from peripheral or incidental transactions of an entity except those that result from expenses or distributions to owners.

Losses

Inflows or other enhancements of assets an entity or settlements of its liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations.

Revenues

Elements of the Income Statement

Revenues Expenses Gains Losses

Focuses on the income related activities that have occurred during the period.

Transaction Approach

If a company holds a non-controlling interest in a subsidiary company, it must present an allocation of net income or loss that is attributable to the non-controlling interest.

True

One of the primary advantages of the single-step income statement is the absence of any implication that one type of revenue or expense has priority over another.

True

The income statement helps investors and creditors predict amounts, timing, and uncertainty of future cash flows.

True