Intermediate Accounting 1 Ch4 Part A

Regal Corporation has a component that is a discontinued operation. The revenues and expenses of the component were $120,000 and $100,000 respectively. The component was sold with a resulting loss of $80,000. The tax rate is 40%. What is the total gain or loss on discontinued operations (net of tax effects) that will be reported on the income statement?

$36,000 loss Reason: ($20,000 - 80,000) x (1-.40) = $36,000 loss.

Which of the following would most likely affect earnings quality?

Accelerating revenue recognition. Losing a major customer.

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

When a company discovers an immaterial error in a year subsequent to the year the error is made, what is the proper course of action?

Correct the error in the year discovered.

Which of the following is required to be disclosed on the face of a public company's income statement?

Earnings per share

Which of the following are accounting errors

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

Expenses reported on an income statement can be classified by nature or by function under these accounting standards.

IFRS

Which standards require certain minimum information to be reported on the face of the income statement?

IFRS

________ requires certain minimum information be reported on the face of the income statement, while _____ does not have minimum requirements.

IFRS; US GAAP

Where on the income statement is income tax expense reported?

In a separate line.

When are restructuring costs recognized on the income statement?

In the period the exit or disposal obligation is incurred.

Revenues, expenses, gains, and losses that will likely continue in future periods make up what?

Income from continuing operations

Which implementation of a mandated change in accounting principle applies to the adoption period and future periods with an adjustment to the beginning balance of retained earnings?

Modified retrospective approach

Which of the following are acceptable methods of presenting the income statement

Multiple-step format Single-step format

A multiple-step income statement includes which of the following?

Operating income Gross profit Income before taxes

When a component classified as a discontinued operation is sold, what two elements are included in calculating the total gain or loss from discontinued operations displayed on the income statement?

Operating income or loss for the period and gain or loss on disposal.

A component is qualified as a discontinued operation. What are the two elements that may be reported in discontinued operations on the income statement if the component is not sold by the end of the reporting period?

Operating income or loss from the component and an impairment loss both reported on a net of tax basis.

If a discontinued operation is held for sale and there is an impairment loss, what are the acceptable methods for disclosing the impairment loss?

Parenthetically on the face of the income statement in discontinued operations. As a disclosure note in the notes to the financial statements.

Crimson Corp. has a component that is a discontinued operation. The component incurred a loss from operations of $40,000. The component was sold with an additional loss of $160,000. The tax rate is 30%. What is the income tax effect for the discontinued operation?

Tax benefit of $60,000 Reason: ($40,000 + 160,000) x 30%

Which of the following best describes why losing a major customer at the end of the fiscal year can affect earnings quality?

The current year's revenue number may not be predictive of next year's revenue.

Which of the following information must be included in the notes to the financial statements regarding discontinued operations?

The identity of the component. The major classes of assets and liabilities of the component. The reason for the discontinuance.

True or false: If a component of an entity is considered held for sale at the end of a quarter, the income effects of that component must be separately reported as discontinued operations.

True

Change in revenue recognition methods. Change to a new standard issued by the FASB. Change in inventory methods.

Which of the following situations qualifies for treatment as a change in accounting principle? (Select all that apply.)

Non-GAAP earnings are calculated

based on management's assumptions of permanent earnings.

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

Which of the following are used to calculate diluted earnings per share

convertible securities options that can be converted to common stock

The primary purpose of the FASB/IASB convergence project on discontinued operations was to

develop a common definition of discontinued operations develop a common set of disclosures

As part of convergence efforts, the FASB and IASB have developed a common definition and common set of financial statement

disclosures

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

error

A change in the residual value of a depreciable asset is treated as a change in accounting

estimate

A(n) _______ loss is reported if a discontinued operation is held for sale and the book value of the assets is more than the fair value minus cost to sell.

impairment

Any long-lived asset, whether tangible or intangible, should have its balance reduced if there has been a significant

impairment, decline, decrease, reduction, or loss

If a company frequently uses restructuring charges in its income statement, an analyst should

include them in the company's permanent earnings stream.

The advantages of a multiple-step income statement is

it reports the relationships between various items. it provides more information than a single-step income statement. it reports expenses by function.

identify which items on an income statement are included in calculating income from continuing operations.

loss income tax revenue

The majority of errors discovered are not and are corrected in the year discovered.

material

An income statement prepared in accordance with IFRS allows expenses to be classified by

nature. function.

In calculating basic earnings per share, ______ is divided by the weighted average common shares outstanding.

net income less any preferred stock dividends

Discontinued operations should be reported on the income statement

net of tax below income from continuing operations.

Additional details about discontinued operations, whether sold or held for sale, are provided in the ________ to the financial statements.

notes or footnotes

Where is earnings per share disclosed in the financial statements?

on the income statement

The more frequently a company incurs restructuring costs, the more appropriate it is for financial statement users to include those costs in estimates of earnings when forecasting future performance.

permanent

When a company changes from one acceptable accounting method to another, this is treated as a change in accounting

principle

The correction of a material error in the prior year's financial statements is considered a

prior period adjustment.

A change in depreciation method is accounted for by

prospectively applying the new method

The Sarbanes-Oxley Act requires that if non-GAAP earnings are included in a report or any public disclosure, the company must

provide a reconciliation with earnings according to GAAP.

The accounting treatment required for a material error in financial statements that have already been issued is to

restate the financial statements of the previous periods affected

Costs that are planned and controlled by management that materially change the scope of the business undertaken or the manner in which the business is conducted are called

restructuring

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

restructuring costs.

A company prepares its income statement by listing all sources of revenues and gains at the top, followed by a list of all expenses and losses. Which income statement approach does this describe?

single-step

The type of income statement that does not classify items as operating and nonoperating is the ______ income statement.

single-step

What items must be removed from continuing operations and reported separately for a discontinued operation?

tax expense expenses gains Revenues

Earnings quality refers to

the ability of reported earnings to predict future earnings.

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

weighted average common shares outstanding.

If a company pays termination benefits in a restructuring and future service is not required, the restructuring costs should be recognized:

when the company communicates the arrangement to employees

The outflows of resources incurred while generating revenue are referred to as

expenses or expense

Which of the following items are included in calculating operating income?

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

What basis is used for estimated restructuring costs?

fair value

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

Beagle Corp. has the following information: Net income $250,000 Preferred dividends $50,000 Common stock, beginning of year 1,000,000 shares Common stock, end of year 1,500,000 shares What is basic earnings per share?

$0.16 per share Reason: ($250,000 - $50,000)/((1,000,000 + 1,500,000)/2)

Which of the following are acceptable ways of implementing a FASB mandated change in accounting principle?

Apply the new standard in the current period and all future periods with no change to prior financial statements. Apply the new standard to all periods presented in the financial statements. Apply the new standard to the current and future periods with an adjustment to the beginning balance of retained earnings in the year of adoption.

Carol Corp. has a component that is a discontinued operations. The component suffered a loss of $60,000. The component was sold for a gain of $200,000. The tax rate is 40%. What is the total income tax effect of the discontinued operations?

Income tax expense of $56,000

_____ from discontinued operations will result in additional income tax expense; _____ from discontinued operations will result in a tax benefit.

Income; Loss

At what amount are the assets of a discontinued operation held for sale reported on the balance sheet?

The lower of the book value or fair value less costs to sell.

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

Non-GAAP earnings

Gains and losses are increases or decreases in equity from which type of transactions?

Peripheral Incidental

How does GAAP typically require that voluntary changes in accounting principle be accounted for?

Retrospectively

Which of the following financial statement elements are measured and reported as a result of providing goods and services to customers?

Revenues Expenses

Public companies report basic earnings per share on their financial statements, but if there are potentially dilutive securities, ____ earnings per share must also be disclosed on the income statement.

diluted or dilutive

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.

A change in accounting principle is a change

from one acceptable accounting method to another.

Which of the following is an increase in equity from a peripheral or incidental transaction that is included in income from continuing operations?

gain

Which of the following items may be included in nonoperating income for a company that manufactures televisions?

gain from sale of land interest income

Income smoothing describes the concept that

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

Lamb Corp. has the following information: Net income $140,000 Preferred dividends $40,000 Common stock, beginning of year 400,000 shares Common stock, end of year 600,000 shares What is basic earnings per share?

$0.20 per share

Crimson Corp. has a component that is a discontinued operation. The revenues and expenses of the component were $200,000 and $240,000, respectively. The component was sold with a resulting loss of $160,000. The tax rate is 30%. What is the total gain or loss on discontinued operations (net-of-tax effects) that will be reported on the income statement?

$140,000 loss

Crimson Corp. has a component that is a discontinued operation. The revenues and expenses of the component were $200,000 and $240,000, respectively. The component was sold with a resulting loss of $160,000. The tax rate is 30%. What is the total gain or loss on discontinued operations (net-of-tax effects) that will be reported on the income statement?

$140,000 loss Reason: (-$40,000 - $160,000) x (1 - 0.30) = $140,000 loss net-of-tax.

Which of the following activities would constitute discontinued operations

A U.S. cereal manufacturer commits to a plan to dispose of its operations in the EU. A retail company, like Target, sells its financial services (credit card) business.

What is one difference in the reporting requirements between most changes in accounting estimates and a change in depreciation method?

A change in depreciation method requires a disclosure of why the new method is preferred, and the others do not.

Which of the following activities would constitute discontinued operations

A retail company, like Target, sells its financial services (credit card) business. A U.S. cereal manufacturer commits to a plan to dispose of its operations in the EU.

Which of the following is a category of accounting change?

Accounting principle

Which of the following are acceptable ways of implementing a FASB mandated change in accounting principle?

Apply the new standard to all periods presented in the financial statements. Apply the new standard in the current period and all future periods with no change to prior financial statements. Apply the new standard to the current and future periods with an adjustment to the beginning balance of retained earnings in the year of adoption.

If a discontinued operation is held for sale and there is an impairment loss, what are the acceptable methods for disclosing the impairment loss

As a disclosure note in the notes to the financial statements. Parenthetically on the face of the income statement in discontinued operations.

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

Blank 1: single Blank 2: multi or multiple

In looking at earnings quality, analysts try to separate a company's ________ earnings effects from its _______ earnings

Blank 1: temporary Blank 2: permanent

Which of the following situations qualifies for treatment as a change in accounting principle?

Change from percent-of-completion to completed contract method. Change from LIFO to FIFO.

Which type of change requires a justification in the notes to the financial statements

Change in depreciation method

Which of the following is a routine change in estimate that does not require a disclosure note if the amount is not material?

Change in estimate for uncollectible accounts. Change in depreciable lives.

Which of the following changes are treated on a prospective basis because the change affects the current period and future periods?

Change in estimate.

Which of the following is required to correct a material error in the financial statements?

Include a disclosure note explaining the impact of the error on income. Restate the financial statements of all years presented. Adjust the beginning balance in retained earnings for the earliest period presented.

If a component of the business qualifies for discontinued operations treatment, which of the following statements are true

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

If a company owns multiple lines of business in different areas such as cable TV, film entertainment, networks, and publishing, and decides to sell a specific unit, the resulting gain or loss would most likely be classified as a(n)______ on the income statement.

discontinued operation

Categorizing operating expenses as nonoperating expenses is an example of

income statement classification shifting.

When a company uses a special charge such as restructuring costs and shows a loss on the income statement, income may be manipulated through

income statement classification shifting.

Janex Company manufactures refrigerators. Which of the following items would likely be included in the determination of nonoperating income on Janex's income statement? Multiple choice question.

interest expense

The process of associating income tax effects with the income statement components that create those effects is referred to as

intraperiod or intra-period tax allocation

The guidance on discontinued operations defines a discontinued operation as a component that either/or

is classified as held for sale has been sold

The income tax expense or benefit associated with discontinued operations

is reported separately from the tax computation for continuing operations. is included in the computation of net income.

If discontinued operations have a _____ effect on the income statement, they must be reported separately.

material

The type of income statement that reports a series of subtotals such as gross profit, operating income, and income before taxes is a ______ income statement.

multiple-step

The three types of accounting changes are a change in

reporting entity. accounting estimate. accounting principle.

When a company voluntarily changes its inventory method from LIFO to FIFO, GAAP typically requires that this change be accounted for

retrospectively

Which of the following items are reported as components of operating income for most manufacturing and merchandising companies?

revenues administrative expenses selling expenses

Analyzing earnings quality requires an analyst to

separate a company's temporary and permanent earnings.

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

A prior period adjustment requires an adjustment to

the beginning balance of retained earnings.

Net income using the multiple-step income statement presentation is ____ net income using the single-step income statement presentation.

the same as

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

they are often nonrecurring.

If a component of the business qualifies for discontinued operations treatment, which of the following statements are true?

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

If a causal relationship cannot be established between revenues and expenses, which of the following occurs?

Allocate the expense over several periods. Relate the expense to a particular period. Record the expense as incurred.

The - Act established a requirement that a if a company includes non-GAAP earnings in any report filed with the SEC or any public disclosure or press release, it must also provide a with earnings determined according to GAAP.

Blank 1: Sarbanes Blank 2: Oxley Blank 3: reconciliation

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

Blank 1: continuing, continued, or continuous Blank 2: discontinued or discontinuing

Changes in accounting estimates are reflected in the financial statements of the ________ period and ________ periods

Blank 1: current Blank 2: future

A change in depreciation method is treated as a change in accounting that is achieved by a change in accounting

Blank 1: estimate or estimates Blank 2: principle, principal, or principel

A gain from discontinued operations will result in an income tax , whereas a loss from discontinued operations will result in an income tax

Blank 1: expense or expenses Blank 2: benefit, savings, or benefits

Although U.S. GAAP uses the term net income on the income statement, IFRS uses the terms and

Blank 1: profit Blank 2: loss or losses

Which of the following are changes in accounting estimates?

Changing the useful life of an asset. Changing the bad debt estimate. Changing the estimate for future warranty expenses.

True or false: Income tax expense may be disclosed either on the income statement or in the notes to the financial statements.

False

True or false: Under both U.S. GAAP and IFRS, the "bottom line" of the income statement is typically referred to as net income or net loss.

False

When a component has been sold and qualifies for treatment as a discontinued operation, the reported income effects disclosed will include which of the following items?

Gain or loss on disposal of the component's assets. Operating income or loss of the component from the beginning of the reporting period to the disposal date.

When an immaterial error is discovered in the same year it is made before the financial statements are issued, what is the appropriate course of action?

Reverse the erroneous journal entry and record the correct entry.

Which of the following is true regarding interim reporting requirements for a discontinued operation?

The income effects of the discontinued component must be separately reported in the quarterly income statement.

Carol Corp. has a component that is a discontinued operation. The revenues and expenses of the component were $100,000 and $160,000, respectively. The component was sold with a resulting gain of $200,000. The tax rate is 40%. What is the total gain or loss on discontinued operations (net-of-tax effects) that will be reported on the income statement?

$84,000 gain Reason: The loss from operating the component is $100,000 - 160,000 = -$60,000. The loss from operating the discontinued operation is then netted against the gain on sale of the discontinued operations -$60,000 + $200,000 = $140,000. The gain net of tax is $140,000 x (1 - 0.40) = $84,000.

A gain from discontinued operations will result in an income tax _______ whereas a loss from discontinued operations will result in an income tax ________ .

Blank 1: expense or expenses Blank 2: benefit, savings, or benefits

The initial measurement of restructuring liabilities is at fair value, which often is estimated as the of estimated future cash outflows.

Blank 1: present Blank 2: value

_____ long-lived assets should have their balance reduced if there has been a significant impairment of value.

Both tangible and intangible