Lists

Gross billings for merchandise sold by Lang Company to its customers last year amounted to $12,720,000; sales returns and allowances were $370,000, sales discounts were $175,000, and freight-out was $140,000. What were net sales last year for Lang Company?

$12,175,000 Correct. Gross Billings - Returns & Allowances - Discounts = Net Sales ($12,720,000 - $370,000 - $175,000 = $12,175,000). Freight out is a selling expense and not included in the calculation of Net Sales.

What is an example of a selling expense?

Advertising expense Correct. Advertising expense is an expense related to the sale of product.

What can the income statement be used to assess?

Creditworthiness Correct. The business and investment community uses the income statement to determine profitability, investment value, and creditworthiness. Creditworthiness is the measure that a company has sufficient income to cover its expenses. Both revenue and expenses are found on the income statement.

What will result if a company fails to properly record an adjusting entry to accrue a revenue item?

Understatement of revenues and an understatement of assets Correct. To accrue a revenue item, the adjusting entry must credit the revenue account (ie: Rental Income) and debit the asset account (ie: Accrued Rent). If this entry is missing, an understatement of revenues and an understatement assets will be present.

What type of revenue is normally accounted for when it is collected and recorded in advance?

Unearned Correct. Revenues that have been paid for, but not earned are classified as unearned revenue.

3 - The retained earnings statement is prepared from the retained earnings

account, dividends, and net income (or net loss).

2 - Companies should prepare an unadjusted trial balance at the end of a given period

after they have recorded the entries in the journal and posted them to the ledger.

The balance sheet is prepared from the

asset, liability, and equity accounts.

3 - Companies must disclose earnings per share on the face of the income statement. If the company has a discontinued item, it must also report income from

continuing operations, discontinued operations, and net income on a per share basis.

The accountant for the Lintz Sales Company is preparing the multiple-step income statement for 2020. Where will the January 1, 2020 merchandise inventory balance appear?

In the Cost of Goods sold section of the income statement Correct. The merchandise inventory balance is used to calculate the Cost of Goods. Cost of Goods is not a selling expense.

In the closing process, the company transfers all of the revenue and expense account balances (income statement items) to a clearing account called

Income Summary, which is used only at the end of the fiscal year.

What limitation of an income statement occurs when one company uses an accelerated depreciation method while another company uses straight-line depreciation?

Income numbers are affected by the accounting methods employed. Correct. Depreciation is an accounting method. If one company uses accelerated depreciation while another uses straight-line, comparing the income of the statements for the two would be affected.

The transaction approach focuses on the activities that occurred during a given period.

Instead of presenting only a net change in net assets, it discloses the components of the change

What is a feature of a multiple-step income statement?

It highlights certain intermediate components of income that analysts use to compute ratios for assessing the performance of the company. Correct. Multi-step income statements highlight certain intermediate components of income, such as operating versus non-operating transaction by matching costs and expenses with related revenues.

Jackson, Inc. has the following information available: Cost of goods sold $148,500 Dividend revenue $ 3,750 Income tax expense $ 3,000 Operating expenses $ 79,500 Sales $255,000 In Jackson's multiple-step income statement, what will gross profit be reported as?

It will be reported at $106,500. Correct. Sales - Cost of Goods = Gross Profit ($255,000 - $148,500 = $106,500

What is true about the presentation of a single-step income?

Just two groupings exist - revenues and expenses. Correct. A single-step income statement consists of only two sections - revenues & expenses

What does the single-step income statement emphasize?

Total revenues and total expenses Correct. A single-step income statement consists of only two sections - revenues & expenses.

What approach focuses on the income-related activities that have occurred during the period?

Transaction Correct. The transaction approach focuses on the income-related activities that have occurred during the period.

3 - The limitations of an income statement are as follows.

(1) The statement does not include many items that contribute to general growth and well-being of a company. (2) Income numbers are often affected by the accounting methods used. (3) Income measures are subject to estimates.

2 - A multiple-step income statement shows two further classifications:

(1) a separation of operating results from those obtained through the nonoperating activities of the company, and (2) a classification of expenses by functions, such as merchandis-ing or manufacturing, selling, and administration.

A multiple-step income statement shows two further classifications:

(1) a separation of operating results from those obtained through the nonoperating activities of the company, and (2) a classification of expenses by functions, such as merchandising or manufacturing, selling, and administration.

Revenues and expenses are matched in

the Income Summary account.

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The simplest journal form chronologically lists transactions and events expressed in terms of

debits and credits to particular accounts.

Prepare adjusted journal entries and closing entries 2 - The major types of adjusting entries are

deferrals (prepaid expenses and unearned revenues) and accruals (accrued revenues and accrued expenses).

That amount is then transferred to an

equity account (Retained Earnings for a corporation and capital accounts for proprietorships and partnerships).

The items entered in a general journal must be transferred (posted) to the

general ledger.

What can investors and creditors predict with the help of the information provided by the income statement?

he amount of future cash flows Correct. An income statement can be used to predict (1) the amount of future cash flows, (2) the timing of future cash flows and (3) the uncertainty of future cash flows. However, Accounts Receivable, a balance sheet item, can be used to evaluate which customers may provide future cash flows.

Adjustments achieve a proper recognition of revenues and expenses, so as to determine

net income for the current period and to achieve an accurate statement of end-of-the-period balances in assets, liabilities, and equity accounts.

Expenses are deducted from revenues to arrive at

net income or loss—a single subtraction.

Frequently, companies report income tax separately as the last item before

net income.

The following information was extracted from the 2020 financial statements of Max Company: Income from continuing operations before income tax - $705,000 Selling and administrative expenses - $480,000 Income from continuing operations - $495,000 Gross profit - $1,350,000 What is the amount reported for other expenses and losses?

$165,000 Correct. Gross Profit - Selling Expenses - Other Expenses = Income from Continuing Operations before Tax. ($1,350,000 - $480,000 - X = $705,000) Solve for X = $165,000

Ortiz Co. had the following account balances: Sales revenue $ 440,000 Cost of goods sold 220,000 Salaries and wages expense 30,000 Depreciation expense 60,000 Dividend revenue 12,000 Utilities expense 24,000 Rent revenue 60,000 Interest expense 36,000 Sales returns and allow. 33,000 Advertising expense 39,000 What would Ortiz Co. report as total expenses in a single-step income statement?

$409,000 Correct. Incorrect. In a single step income statement, all expenses, regardless of sources are listed in the expense section of the income statement. Cost of Goods Sold, Salaries & Wages, Depreciation, Utilities, Interest, and Advertising are all expenses.

James, Inc. incurred the following infrequent losses during 2020: A $280,000 write-down of equipment leased to others A $160,000 adjustment of accruals on long-term contracts A $240,000 write-off of obsolete inventory In its 2020 income statement, what amount should James report as total unusual losses?

$680,000 Correct. Each of these items are considered unusual and infrequent. Therefore the amount James will report as total unusual losses is $680,000 ($280,000 + $160,000 + $240,000)

Explain how to report various income items. Companies generally include unusual or infrequent gains or losses or both or non-recurring items in the income statement as follows.

(1) Other items of a material amount that are of an unusual or infrequent nature or both are separately disclosed as a component of continuing operations. (2) Discontinued operations are classified as a separate item, after income from continuing operations. (3) If a company holds a noncontrolling interest in a subsidiary company, it must present an allocation of net income or loss that is attributable to the noncontrolling interest.

Describe the content and format of the income statement. 4 - The major elements of the income statement are as follows.

1 - Revenues: Inflows or other enhancements of assets of 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. 2 - Expenses: 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. 3 - Gains: Increases in equity (net assets) from peripheral or incidental transactions of an entity except those that result from revenues or investments by owners. 4 - Losses: Decreases in equity (net assets) from peripheral or incidental transactions of an entity except those that result from expenses or distributions to owners.

The following information relates to the Wallstrom Company at the end of 2020: The accounting period is the calendar year. Employees are paid every Friday for the five-day week ending on that day. Salaries amount to $4,000 per week. The accounting period ends on a Tuesday. Using the information given above, what is the necessary adjusting entry at December 31, 2020?

Debit Salaries & Wages Expense, Credit Salaries & Wages Payable; $1,600 Correct. ($4,000 ÷ 5 = $800); ($800 × 2 = $1,600 accrued salaries).

Expenses are deducted from revenues to arrive at net income or loss—a single subtraction.

Frequently, companies report income tax separately as the last item before net income.

Which component occurs from peripheral or incidental transactions?

Gain on the sale of equipment Correct. Gains and losses, however, are peripheral or incidental to the major operations of the company.

What is an advantage of the single-step income statement over the multiple-step income statement?

It does not imply that one type of revenue or expense has priority over another. Correct. The primary advantage of the single-step format lies in its simple presentation and the absence of any implication that one type of revenue or expense item has priority over another.

What is true about the information provided in the income statement?

It helps in evaluating the past performance of the enterprise. Correct. Examining revenues and expenses indicates how the company performed and allows comparison of its performance to its competitors.

What is classified as an unusual and infrequent gain or loss?

Losses on inventory related to a plant fire Correct. A fire in the plant that results in losses is both unusual and infrequent.

Which approach does income reporting follow?

Modified all-inclusive Correct. The accounting profession has adopted the modified all-inclusive concept where companies record most items, including unusual or infrequent ones, as part of net income. In addition, companies are required to highlight these items in the financial statements so that users can better determine the long-run earning power of the company.

What does the income statement reveal about an organization?

Net earnings (net income) of the organization for a period of time Correct. The income statement reports net earnings (net income) for a period of time, such as month or a year.

How is an expense best described?

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. Correct. Expenses are defined as 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.

What is an example of an accrued expense?

Property taxes incurred during the year, to be paid in the first quarter of the subsequent year Correct. Because the taxes are for the current year, but will not be paid until the subsequent year, it is necessary to create an accrual entry for the current year.

What are the major elements of the income statement?

Revenues, expenses, gains, and losses Correct. The four major elements of an income statement are revenues, expenses, and non-operating gains and losses.

2 - The major types of adjusting entries are

referrals (prepaid expenses and unearned revenues) and accruals (accrued revenues and accrued expenses).

4 - The transaction approach to income measurement requires the use of

revenue, expense, loss, and gain accounts.

In a single-step income statement, just two groupings exist:

revenues and expenses.

Prepare adjusted journal entries and closing entries Adjustments achieve a proper recognition of

revenues and expenses, so as to determine net income for the current period and to achieve an accurate statement of end-of-the-period balances in assets, liabilities, and equity accounts.

In a single-step income statement, just two groupings exist:

revenues and expenses.

Companies can prepare financial statements directly from

the adjusted trial balance.

Identify the uses and limitations of an income statement. The income statement is useful because it provides investors and creditors with information that helps them predict

the amounts, timing, and uncertainty of future cash flows.

The net result of this matching represents

the net income or net loss for the period.

The income statement is prepared from

the revenue and expense accounts.

Also, the income statement helps users determine

the risk (level of uncertainty) of not achieving particular cash flows.