Chapter 4 The Income Statement, Comprehensive Income, and the Statement of Cash SmartBook

To qualify as an operation for purposes of determining discontinued operations, which of the following must occur? (Select all that apply.)

-A component of the entity has been sold, disposed of, or is held for sale. -A strategic shift is represented that will have a major effect on financial results.

Match each company to the type of revenue it receives. Instructions

-ABC Tax Advisors - Service Revenue -Best Buy - Sales Revenue

Which of the following are significant noncash activities? (Select all that apply.)

-Acquiring equipment by issuing a long-term note. -Acquiring land by issuing common stock.

If a component of the business qualifies for discontinued operations treatment, which of the following statements are true? (Select all that apply.)

-All related revenues, expenses, gains, and losses must be removed from continuing operations. -The tax expense effect is removed from continuing operations.

How are discontinued operations reported? (Select all that apply.)

-Below income from continuing operations. -As a separate line item on the income statement. -With separate reporting of the tax effect on the item of discontinued operations.

Which of the following are accounting errors? (Select all that apply.)

-Forgetting to accrue salary expense. -Making a mistake in calculating depreciation expense.

Which of the following are acceptable methods for reporting comprehensive income? (Select all that apply.)

-In one single statement of comprehensive income -in two consecutive statements - income statement and comprehensive income statement

The purpose of the statement of cash flows includes which of the following? (Select all that apply.)

-Provide information about cash receipts during a period. -Provide information about cash disbursements during a period.

What items must be removed from continuing operations and reported separately for a discontinued operation? (Select all that apply.)

-Revenues -gains -tax expense -expenses

The three types of accounting changes are a change in

-accounting estimate. -accounting principle. -reporting entity.

Which of the following items are reported as components of operating income for most manufacturing and merchandising companies? (Select all that apply.)

-administrative expenses -selling expenses -revenues

The classifications on the statement of cash flows are cash flows from (Select all that apply.)

-investing activities. -financing activities. -operating activities.

The statement of cash flows is useful because (select all that apply)

-it reveals the company's ability to generate positive cash flow from its normal operations -it provides information about liquidity

Investing activities involve the acquisition and sale of (Select all that apply.)

-nonoperating investment assets. -long-lived assets used in business operations.

In order to provide more complete information, U.S. GAAP allows that any significant noncash investing and financing activities may be reported (Select all that apply.)

-on the face of the statement of cash flows. -in the notes to financial statements.

Which of the following items are included in calculating operating income? (Select all that apply.)

-revenues related to primary revenue-generating activities -expenses related to primary revenue-generating activities

Compute the asset turnover ratio using the following information: net sales is $100,000 for the year, last year's assets in place were $900,000 and this year's assets in place are $1,100,000. Receivables for both years are $50,000.

10% (Net sales/average total assets = $100,000/[($900,000 + $1,100,000)/2] = 10%)

Which of the following is a category of accounting change?

Accounting principle

Income tax expense is reported in what way on the income statement?

As a separate line item.

Which of the following is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding?

Basic earnings per share

Which type of activities involve cash inflows and outflows from transactions with creditors and owners?

Financing

Where on the income statement is income tax expense reported?

In a separate line.

Inflows and outflows of cash related to the acquisition and disposition of long-lived assets used in operations and investment assets are what type of cash flow?

Investing

What is the formula for the asset turnover ratio?

Net sales divided by average total assets.

Management's assessment of permanent earnings are referred to as what?

Non-GAAP earnings

_ costs include costs associated with shutdown or relocation of facilities.

Restructuring

The inflow of resources resulting from providing goods or services to customers is referred to as _.

Revenues

Which is a significant noncash activity?

Signing a note payable in exchange for land.

True or false: Reporting comprehensive income can be done with a single, continuous statement or in two separate, but consecutive statements.

True

True or false: The single-step and the multiple-step formats are most commonly used in income statement preparation; however, there are no specific standards on how income from continuing operations must be displayed.

True

The statement of cash flows is useful because

accrual-based income is not an indication of cash flows.

Other comprehensive income is reported in the current reporting period on the income statement or as an addition to the income statement, and _ other comprehensive income is reported on the balance sheet.

accumulated

Which of the following is disclosed on the balance sheet?

accumulated other comprehensive income

Asset turnover ratio is net sales divided by

average total assets.

Non-GAAP earnings are calculated

based on management's assumptions of permanent earnings.

The potential tax expense or benefits of items reported as components of Other Comprehensive Income

can be shown separately for each item or aggregated and reported as one line item

The operating activities section on the statement of cash flows includes the elements of net income on a(n)_ basis rather than a(n) _ basis.

cash, accrual

A discontinued operation is reported when a _ of an entity either (a) has been disposed of or (b) is classified as held for sale.

component

Net income is a part of

comprehensive income

Companies have considerable flexibility in reporting income from _ operations, but the reporting of income from _ operations is strictly mandated.

continued, discontinued

Separate reporting as a(n) _ operation is required when the disposal of a component represents a strategic shift that has, or will have, a major effect on a company's operations and financial results.

discontinued

U.S. GAAP requires that a statement of cash flows must be presented for

each period for which a balance sheet and income statement are prepared.

The evidence that a financial statement user or analyst might use as evidence to suggest that earnings have been smoothed is

earnings have a steady stream over time.

When a transaction is recorded incorrectly or is not recorded at all, this is treated as an accounting _.

error

Cash borrowed or paid to a creditor is an example of a(n) _ activity.

financing

Non-GAAP earnings are

management's estimates and view of earnings.

Income smoothing describes the concept that

managers manipulate the pattern of income to not vary much between years.

Discontinued operations should be reported on the income statement

net of tax below income from continuing operations.

The calculation of _ income omits certain gains and losses that are instead included in the broader perspective of other _ income. (Enter one word per blank.)

net, comprehensive

The inflows and outflows of cash that result from activities reported in the income statement are classified as cash flows from _ activities.

operating

The statement of cash flows classifies items as

operating, investing, and financing.

Significant noncash investing and financing activities are disclosed because they

provide more complete information.

The ability of reported earnings to predict a company's future earnings is referred to as earnings _.

quality

If a company reorganizes its operation to gain efficiency, the cost associated with this reorganization is classified as

restructuring costs.

Analyzing earnings quality requires an analyst to

separate a company's temporary and permanent earnings.

The two approaches for preparing an income statement are the _ step and _ step approaches.

single, multiple

The financial statement that provides information about cash receipts and cash disbursements for the period is the

statement of cash flows.

Nonoperating items that are not expected to continue into the future are considered a _ component of earnings and should be _ when forecasting future performance.

temporary; excluded

Earnings quality refers to

the ability of reported earnings to predict future earnings.

Gains and losses from the sale of investments can affect earnings quality because

they are often nonrecurring.

Basic earnings per share is calculated as net income available to common shareholders divided by

weighted average common shares outstanding.