Chapter 4

Earnings per share data are required on the face of the 1. income statement 2. balance sheet 3. statement of retained earnings 4. statement of stockholders' equity

1

A material item which is unusual in nature or infrequent in occurrence, but not both should be shown in the income statement 1. Net of Tax : No. Disclosed Separately: Yes. 2. Net of Tax : Yes. Disclosed Separately: Yes. 3. Net of Tax : Yes. Disclosed Separately: No. 4. Net of Tax : No. Disclosed Separately: No.

1

For Mortenson Company, the following information is available: Cost of goods sold $130,000 Dividend revenue 5,000 Income tax expense 12,000 Operating expenses 46,000 Sales revenue 200,000 In Mortenson's single-step income statement, gross profit 1. should not be reported. 2. should be reported at $75,000. 3. should be reported at $17,000. 4. should be reported at $70,000.

1

Manning Company has the following items: write-down of inventories, $360,000; loss on disposal of Sports Division, $555,000; and loss due to strike, $359,000. Ignoring income taxes, what amount should Manning Company report as extraordinary losses? 1. $ -0-. 2. $555,000. 3. $719,000. 4. $914,000.

1

The income statement provides investors and creditors with information to predict all of the following except the: 1. sources of future cash flows. 2. timing of future cash flows. 3. uncertainty of future cash flows. 4. amount of future cash flows.

1

The major elements of the income statement are 1. revenues, expenses, gains, and losses. 2. revenues, irregular items, and general expenses. 3. revenue, cost of goods sold, selling expenses, and general expense. 4. operating section, nonoperating section, discontinued operations, extraordinary items, and cumulative effect.

1

Under which of the following conditions would material flood damage be considered an extraordinary item for financial reporting purposes? 1. Only if floods in the geographical area are unusual in nature and occur infrequently. 2. Under any circumstances as an extraordinary item. 3. Flood damage should never be classified as an extraordinary item. 4. Only if the flood damage is material in amount and could have been reduced by prudent management.

1

Which of the following is an example of managing earnings down? 1. Revising the estimated life of equipment from 10 years to 8 years. 2. Changing estimated bad debts from 3 percent to 2.5 percent of sales. 3. Not writing off obsolete inventory. 4. Reducing research and development expenditures.

1

Which of the following is true about intraperiod tax allocation? 1. Its purpose is to relate the income tax expense to the items which affect the amount of tax. 2. It arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return. 3. It is required for extraordinary items and cumulative effect of accounting changes but not for prior period adjustments. 4. Its purpose is to allocate income tax expense evenly over a number of accounting periods.

1

Gross billings for merchandise sold by Lang Company to its customers last year amounted to $11,720,000; sales returns and allowances were $370,000, sales discounts were $175,000, and freight-out was $140,000. Net sales last year for Lang Company were 1. $11,175,000. 2. $11,035,000. 3. $11,350,000. 4. $11,720,000.

1 ($11,720,000 - $370,000 - $175,000 = $11,175,000.)

At Ruth Company, events and transactions during 2014 included the following. The tax rate for all items is 30%. (1) Depreciation for 2012 was found to be understated by $90,000. (2) A strike by the employees of a supplier resulted in a loss of $75,000. (3) The inventory at December 31, 2012 was overstated by $120,000. (4) A flood destroyed a building that had a book value of $1,500,000. Floods are very uncommon in that area. The effect of these events and transactions on 2014 income from continuing operations net of tax would be 1. ($52,500). 2. ($199,500). 3. ($115,500). 4. ($1,249,500).

1 ($75,000 - $22,500 = $52,500.)

A company is not required to report a per share amount on the face of the income statement for which one of the following items? 1. Discontinued operations 2. Prior period adjustment 3. Extraordinary item 4. Net income

2

Ortiz Co. had the following account balances: Sales revenue $ 220,000 Cost of goods sold 110,000 Salaries and wages expense 15,000 Depreciation expense 30,000 Dividend revenue 6,000 Utilities expense 12,000 Rent revenue 30,000 Interest expense 18,000 Sales returns and allow 16,500 Advertising expense 19,500 What would Ortiz report as total expenses in a single-step income statement? 1.$210,500 2. $204,500 3. $221,000 4. $94,500

2

Income taxes are allocated to 1. discontinued operations. 2. extraordinary items. 3. all of these answer choices are correct. 4. prior period adjustments.

3

Which of the following is true about the information provided in the income statement? 1. It provides a basis for predicting future performance. 2. It helps assess the risk or uncertainty of achieving future cash flows. 3. All of these answer choices are correct. 4. It helps in evaluating the past performance of the enterprise.

3

Palomo Corp has a tax rate of 30 percent and income before non-operating items of $1,071,000. It also has the following items (gross amounts). Unusual gain $ 69,000 Loss from discontinued operations 549,000 Dividend revenue 18,000 Income increasing prior period adjustment 222,000 What is the amount of income tax expense Palomo would report on its income statement? 1. $249,300 2. $326,700 3. $347,400 4. $182,700

3 (($1,071,000 + $69,000 + $18,000) × .30 = $347,400.)

An item that should be classified as an extraordinary item is 1. write-off of goodwill. 2. gains from transactions involving foreign currencies. 3. losses from moving a plant to another city. 4. gains from a company selling the only investment it has ever owned.

4

For Mortenson Company, the following information is available: Cost of goods sold $130,000 Dividend revenue 5,000 Income tax expense 12,000 Operating expenses 46,000 Sales revenue 200,000 In Mortenson's multiple-step income statement, gross profit 1. should be reported at $17,000. 2. should be reported at $75,000. 3. should not be reported. 4. should be reported at $70,000.

4

How should an unusual event not meeting the criteria for an extraordinary item be disclosed in the financial statements? 1. Shown in operating revenues or expenses if material but not shown as a separate item. 2. Shown net of income tax after ordinary net earnings but before extraordinary items. 3. Shown net of income tax after extraordinary items but before net earnings. 4. Shown as a separate item in operating revenues or expenses if material and combined with other items if not material in amount.

4

If plant assets of a manufacturing company are sold at a gain of $1,500,000 less related taxes of $450,000, and the gain is not considered unusual or infrequent, the income statement for the period would disclose these effects as 1. operating income net of applicable taxes, $1,050,000. 2. a prior period adjustment net of applicable taxes, $1,050,000. 3. an extraordinary item net of applicable taxes, $1,050,000. 4. a gain of $1,500,000 and an increase in income tax expense of $450,000

4

What might a manager do during the last quarter of a fiscal year if she wanted to improve current annual net income? 1. Delay purchases from suppliers until after the end of the fiscal year. 2. Increase research and development activities. 3. Delay shipments to customers until after the end of the fiscal year. 4. Relax credit policies for customers.

4

Which of the following is an example of managing earnings up? 1. Writing off obsolete inventory. 2. Accruing a contingent liability for an ongoing lawsuit. 3. Decreasing estimated salvage value of equipment. 4. Underestimating warranty claims.

4

At Ruth Company, events and transactions during 2014 included the following. The tax rate for all items is 30%. (1) Depreciation for 2012 was found to be understated by $90,000. (2) A strike by the employees of a supplier resulted in a loss of $75,000. (3) The inventory at December 31, 2012 was overstated by $120,000. (4) A flood destroyed a building that had a book value of $1,500,000. Floods are very uncommon in that area. The effect of these events and transactions on 2014 net income net of tax would be 1. ($1,165,500). 2. ($1,249,500). 3. ($52,500). 4. ($1,102,500).

4 $52,500 + ($1,500,000 × .7) = $1,102,500.

The following information was extracted from the 2014 financial statements of Max Company: Income from continuing operations before income tax $470,000 Selling and administrative expenses 320,000 Income from continuing operations 329,000 Gross profit 900,000 Income before extraordinary item 290,000 The amount reported for other expenses and losses is 1. $150,000. 2. $141,000. 3. $39,000. 4. $110,000.

4 ($900,000 - $320,000 - $470,000 = $110,000.)

Arreaga Corp. has a tax rate of 40 percent and income before non-operating items of $928,000. It also has the following items (gross amounts). Unusual loss $148,000 Extraordinary loss 404,000 Gain on disposal of equipment 32,000 Change in accounting principle increasing prior year's income 212,000 What is the amount of income tax expense Arreaga would report on its income statement? 1. $248,000 2. $371,200 3. $396,800 4. $324,800

4 (($928,000 - $148,000 + $32,000) × .40 = $324,800.)