ACCT 301 Exam 1

When do Discontinued Operations occur?

-A company eliminates the results of operations of a component of the business. -The elimination of a component that represents a strategic shift, having a major effect on the company's operations and financial results.

Earnings Per Share

-A significant business indicator. -Measures the dollars earned by each share of common stock. -Must be disclosed on the income statement.

Changes in Accounting Estimates

-Accounted for in the period of change or the period of and the future periods if the change affects both. -Not handled retrospectively. -Not considered errors.

What's included in Comprehensive Income?

-All revenue and gains, expenses and losses reported in net income -All gains and losses that bypass net income but affect stockholders' equity

Examples of change in Accounting Principle?

-Change from FIFO to average cost -Change from the percentage-of-completion to the completed-contract method

The Following items are disclosed in the Statement of Stockholders' Equity:

-Contributions (issuances of shares) and distributions (dividends) to owners. -Reconciliation of the carrying amount of each component of stockholders' equity from the beginning to the end of the period.

Examples of Expense Accounts

-Cost of goods sold -Depreciation -Interest -Rent -Salaries and wages -Taxes

Format of the Income Statement

-Format referred to as multiple-step income statement. -Separates operating transactions from nonoperating transactions. -Matches costs and expenses with related revenues. -Highlights certain components of income that analysts use assessing financial performance.

Where do Accounting Errors result from?

-Mathematical mistakes. -Mistakes in application of accounting principles. -Oversight or misuse of facts

What increases Retained Earnings?

-Net Income -Changes in accounting principle -Prior period adjustments

What decreases Retained Earnings?

-Net Loss -Dividends -Change in accounting principles -Prior period adjustments

Common for companies to present some or all of the following sections and totals within the income statement.

-Operating section -Nonoperating section -Income tax -Discontinued operations -Noncontrolling interest -Earnings per share

Changes in Accounting Principle

-Retrospective adjustment. -Cumulative effect adjustment to beginning retained earnings. -Approach preserves comparability across years.

Gains and Losses can result from

-Sale of investments or plant assets, -Settlement of liabilities, -Write-offs of assets.

Examples of Revenue Accounts

-Sales -Fee -Interest -Dividend -Rent

Other Comprehensive Income

-Unrealized gains and losses on available-for-sale securities. -Translation gains and losses on foreign currency. -Plus others

Companies are required to report unusual and infrequent items as part of net income so users can better determine the long-run earning power of the company

-Unusual gains and losses. -Discontinued operations. -Noncontrolling interest. -Earnings per share

Examples of Change in Accounting Estimates

-Useful lives and salvage values of depreciable assets -Allowance for uncollectible receivables -Inventory obsolescence

Examples of change in Accounting Estimates?

-Useful lives and salvage values of depreciable assets. -Allowance for uncollectible receivables. -Inventory obsolescence.

In 2017, Austin Enterprises reported net income of $674,000. It declared and paid preferred stock dividends of $200,000 and common stock dividends of $75,000. During 2017, Austin Enterprises had a weighted average of 300,000 common shares outstanding. Compute Austin Enterprises' 2017 earnings per share.

$1.58

Marco Industries has an income tax rate of 30%. Their reported income from operations is $350,000; The company also had a loss from flood damage of $80,000. Which of the following is the correct amount of the company's net income from continuing operations?

$189,000

Lancer, Inc. reports net income of $350,000. It declares and pays preferred dividends of $50,000 for the year. The weighted-average number of common shares outstanding during the year is 100,000 shares. What are the Earnings Per Share?

$3.00

Change in Accounting Estimates

Accounted for in the period of change or the period of and the future periods if the change affects both

On the income statement, how should the transaction be reported when a company discontinues an operation and disposes of the discontinued operation (component)?

As a disclosure on the face of the income statement showing earnings per share from continuing operations, discontinued operations, and net income

Which of the following transactions would be least likely to have an effect on the net income for 2017? A Collection in 2017 of a dividend from an investment. B Stock purchased in 2000 and deemed worthless in 2017. C Correction of an error in the financial statements of a prior period discovered subsequent to their issuance. D Sale in 2017 of an office building contributed by a stockholder in 1968.

C Correction of an error in the financial statements of a prior period discovered subsequent to their issuance.

Which of the following is a common line item on the income statement when reporting earnings per share? A Net income plus gross margin B Income before adjustments C Income from discontinued operations, net of tax D Net income before tax

C Income from discontinued operations, net of tax

With regard to comprehensive income, how does net income differ in a one statement approach compared to a two statement approach? A Net income in a one statement approach is used to calculate earnings per share, but earnings per share are not reported in a two statement approach. B Net income includes comprehensive income in a one statement approach but not in a two statement approach. C Net income is reported as a subtotal in a one statement approach but as a total on a two statement approach. D Net income includes income, expenses, gains, and losses all together in a one statement approach, but income and expenses are separated from gains and losses when calculating net income in a two statement approach.

C Net income is reported as a subtotal in a one statement approach but as a total on a two statement approach.

What is the difference between appropriated retained earnings and free retained earnings? A Appropriated retained earnings can only be used at an executive's discretion, whereas free retained earnings can be used by anyone in the company. B Appropriated retained earnings can only be used for purchasing major assets, whereas free retained earnings can only be used for dividends. C Appropriated retained earnings can only be used for dividends, whereas free retained earnings are used to reinvest back into the company. D Appropriated retained earnings can only be used for specific purposes, whereas free retained earnings can be used as needed by the company.

D Appropriated retained earnings can only be used for specific purposes, whereas free retained earnings can be used as needed by the company.

Which of the following is the primary reason the income statement is so important to investors and creditors? A Because of its ability to help determine the amount of future income the entity may generate from current operations. B Because of its ability to help determine the honesty of those involved in managing the enterprise. C Because of its ability to help assess the financial position of the entity at a point in time. D Because of its ability to help predict the amount, timing, and uncertainty of future cash flows.

D Because of its ability to help predict the amount, timing, and uncertainty of future cash flows.

Which of the following is an example of a gain? A Sale of new equipment for market value. B Sale of finished products for cash. C Sale of services on credit. D Sale of used equipment for above book value.

D Sale of used equipment for above book value.

All of the following items would likely be reported on the income statement as an extraordinary item EXCEPT A A large loss as a result of an earthquake. B The write-off of major assets as a result of new environmental laws prohibiting their use. C Expropriation of assets by a foreign government. D The write-off of a large receivable resulting from a customer's bankruptcy proceedings.

D The write-off of a large receivable resulting from a customer's bankruptcy proceedings.

How are expenses and losses similar? A They both refer to transactions related to peripheral operations. B They both refer to transactions related to major operations. C They both increase net income. D They both decrease net income.

D They both decrease net income.

Items that would be presented in the income statement only in the account affected and NOT in a separate section include A discontinued operations. B earnings per share. C continuing operations. D changes in estimates.

D changes in estimates.

Discontinued operations are reported in the income statement because of a concept called the A prior period adjustment concept. B current operating performance concept. C phase-out period concept. D modified all-inclusive concept.

D modified all-inclusive concept.

Which of the following can be determined by looking at a company's income statement? A net income or loss of a firm at a point in time. B resources and equities of a firm for a period of time. C resources and equities of a firm at a point in time. D net income or loss of a firm for a period of time.

D net income or loss of a firm for a period of time.

For the first quarter of 2017, Kabak Industries paid a dividend of $500,000 to stockholders. The accountants at Kabak should record this distribution on the A income statement. B comprehensive expense statement. C balance sheet. D retained earnings statement.

D retained earnings statement.

Losses

Decreases in equity (net assets) from peripheral or incidental transactions.

Where is Other Comprehensive Income reported?

Stockholders' Equity

What is the "single-step" involved in single-step incomes statements?

Subtracting expenses from revenues

common stock

Term used to describe the total amount paid in by stockholders for the shares they purchase.

Securities and Exchange Commission (SEC)

The agency of the U.S. government that oversees U.S. financial markets and accounting standard-setting bodies.

500s

expenses

Revenues are characterized by cash

inflows as a result of a company's central operations.

200s

liabilities

assets

money and other valuables belonging to an individual or business

300s

owner's equity

convergance

process of reducing differences between GAAP and IRFS

400s

revenue

Unusual

High degree of abnormality and of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the company, taking into account the environment in which it operates.

How do you calculate Net Income?

Income from Operations + Gains - Interest Expense - Losses

Gains

Increases in equity (net assets) from peripheral or incidental transactions.

revenues

Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity's ongoing major or central operations, such as Sales

Revenues

Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity's ongoing

100s

assets

fair value principle

assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)

Cash inflows as a result of a company's central operations are classified as

Revenues

An example of managing earnings downward is

Revising the estimated life of equipment from 10 years to 8 years

How do you calculate Income from Operations?

Sales Revenue - Cost of Goods Sold - Sales & Administrative expenses

Stockholders' Equity

The owners' equity in a corporation. -common stock plus retained earnings

During the fiscal year 2017, Estrada Enterprises had the following values that needed to be recorded in their income statement: Disbursements for purchases $973,000 Increase in trade accounts payable $55,000 Decrease in merchandise inventory $16,000 What was Estrada Enterprises' cost of goods sold for 2017? A $1,044,000. B $973,000. C $1,028,000. D $989,000.

A $1,044,000. Disbursements + Increase in liability + Decrease in asset

Which of the following is a benefit of the multiple-step income statement compared to the single-step income statement? A The multiple-step income statement shows gross margin and recognizes different types of costs and expenses. B The multiple-step income statement contains two account groupings. C The multiple-step income statement eliminates potential classification problems. D The multiple-step income statement recognizes no distinction in types of costs or expenses.

A The multiple-step income statement shows gross margin and recognizes different types of costs and expenses.

How should a correction of errors be treated? A They should be treated similar to changes in accounting principles as prior period adjustments. B They should only be reflected in the current year's financial statements if a company presents prior years' financial statement for comparative purposes even if the error affected prior years. C They should only be disclosed in a footnote so readers will be aware of the errors. D They should only be reflected in the current year's balance sheet and never the income statement.

A They should be treated similar to changes in accounting principles as prior period adjustments.

The most likely use of an income statement prepared by a business enterprise is A use by investors interested in assessing components of the company's profitability. B use by labor unions to examine earnings closely as a basis for salary discussions. C use by customers to determine a company's ability to provide needed goods and services. D use by government agencies to formulate tax and economic policy.

A use by investors interested in assessing components of the company's profitability.

Comprehensive Income

All changes in equity during a period except those resulting from investments by owners and distribution to owners

liabilities

Amounts owed to creditors

historical cost principle

An accounting principle that states that companies should record assets at their cost. -values change over time

International Accounting Standards Board (IASB)

An accounting standard-setting body that issues standards adopted by many countries outside of the United States.

retained earnings

An amount earned by a corporation and not yet distributed to stockholders.

Economic Entity Assumption

An assumption that every economic entity can be separately identified and accounted for.

Monetary Unit Assumption

An assumption that requires that only those things that can be expressed in money are included in the accounting records.

The income statement for Byrd Enterprises shows "income before income taxes and extraordinary items" in the amount of $472,000. The income taxes payable for the year are $282,000, including $117,000 that is applicable to an extraordinary gain. Thus, the "income before extraordinary items" is: A $190,000. B $307,000. C $472,000. D $355,000.

B $307,000.

Disposal of which of the following would qualify as a disposal of a component? A A technology company upgrades its software. B A transportation company sells its bus operations but not its airline operations. C A toy company phases out one product line. D An auto parts manufacturer sells one of its five parts-manufacturing subsidiaries.

B A transportation company sells its bus operations but not its airline operations.

Which of the following would an accountant report on both the Statement of Stockholders' Equity and the Balance Sheet? A total revenue B accumulated other comprehensive income C net income D total expenses

B accumulated other comprehensive income

If a company changes their inventory pricing method from FIFO to average cost, it would represent a(n) A change in estimate. B change in principle. C discontinued operation. D noncontrolling interest.

B change in principle.

Why do some believe that recognizing fair values in net income is misleading?

Because fair value is always changing

Which of the following is often necessary even if original calculations were made in good faith? -Changes in retained earnings -Changes in accounting estimates -Changes in accounting practices -Changes in net income

Changes in accounting estimates

Ashton is an investor looking at the income statements of two different companies. The first company has a very detailed income statement, and the second company has a very condensed income statement. Which company is Ashton more likely to invest in? Why?

Company 1, because the detail in the income statement allows him to more accurately predict future cash flows.

dividends

Company's share profits to the shareholders based on the corporation's performance.

What might an analyst do who is trying to evaluate the past performance of a company?

Compare the company's current income statement to the company's previous income statements.

Some companies categorize ______ based on product line, function, operating and nonoperating activities, or other appropriate categories.

Income

Which of the following is not included in comprehensive income? -Dividend revenue -Losses on disposal of assets -Investments by owners -Unrealized holding gains

Investments by owners

Which of the following limitations result because income measurement involves judgment? -It may not be possible to compare net income directly between different companies. -Net income cannot be used to predict future cash flows. -Net income does not reflect the company's actual cash flow for a period of time. You got it wrong : -Net income does not reflect income that cannot be reliably measured.

It may not be possible to compare net income directly between different companies.

Which of the following is true of the nonoperating section of a multi-step income statement? -It contains subsections regarding federal and state taxes. -It contains four main subsections. -It reports the results of the company's principal operations. -It reports the results of auxiliary activities of the company.

It reports the results of auxiliary activities of the company.

Which of the following does not have a column in the statement for stockholders' equity?

Net Income

How do you calculate Comprehensive Income?

Net Income + Unrealized Gains/Losses

How do you calculate Retained Earnings?

Net Income - Dividends

Earnings Per Share (Formula)

Net Income - Preferred Dividends / Weighted Average of Common Shares Outstanding

expenses

Outflows or other using-up of assets or incurrences of liabilities that constitute the entity's ongoing major or central operations, such as Cost of Goods Sold, Depreciation & Amortization, Selling Expenses and so on

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.

Expenses

Outflows or other using-up of assets or incurrences of liabilities that constitute the entity's ongoing major or central operations

Faithful Representation Principle

Principle that asserts accounting information is based on the fact that the data faithfully represents the measurement or description of that data. Faithfully represented data are complete, neutral, and free from material error

Statement of Stockholder' Equity

Reports the changes in each stockholders' equity account and total equity for the period.

Going Concern Assumption

The assumption that the company will continue in operation for the foreseeable future.

Financial Accounting Standards Board (FASB)

The primary accounting standard-setting body in the United States.

Relevance

The quality of information that indicates the information makes a difference in a decision.

What is another name for the one statement approach?

The statement of comprehensive income

If gains and losses are identified as other comprehensive income, then they have the same status as traditional gains and losses under which of the following?

The two statement approach

Why do companies sometimes use earnings management?

To beat Wall Street's expectations so that the value of the company's stock increases.

Infrequency of occurrence

Type of transaction that is not reasonably expected to recur in the foreseeable future, taking into account the environment in which the company operates.

Generally Accepted Accounting Principles (GAAP)

a set of accounting standards that is used in the preparation of financial statements