Chapter 4 Smartbook

Gulf Corp. has the following information: End of Year 1 End of Year 2 Net sales $ 80,000 $100,000 Total assets 600,000 800,000 Accounts receivable 30,000 50,000 What is the asset turnover ratio for year 2 rounded to the nearest 1/1000?

0.143

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

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

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 of the following is a routine change in estimate that does not require a disclosure note if the amount is not material? (Select all that apply.)

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

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

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

Inflows and outflows of cash related to the transactions used to determine net operating income are what type of activities?

Operating

Which of the following is a category of accounting change?

Reporting entity

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

Restructuring

Which of the following are commonly used to assess a company's profitability?

Return on equity Return on assets Profit margin on sales

Operating, investing, and financing activities are found on which financial statement?

Statement of Cash Flows

Which of the following is disclosed on the balance sheet?

accumulated other comprehensive income

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

administrative expenses revenues selling expenses

Cash flows from investing activities include inflows and outflows of cash related to the acquisition and disposition of long-term _____ used in operations. (Enter only one word.)

assets

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

A discontinued operation is reported when a ___________________ of an entity either (a) has been disposed of or (b) is classified as held for sale. (Enter one word per blank)

component

Net income is a part of

comprehensive income

Revenues, expenses, gains, losses, and income tax related to a(n) ________________ __________________must be removed from continuing operations and reported separately on the income statement.(Enter only one word per blank.)

discontinued operations

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

error

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

estimate ; principle

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

gains expenses tax expense Revenues

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

Income smoothing describes the concept that

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

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

material

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.

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.

Profit margin on sales, return on assets, and return on shareholders' equity are commonly used _____ ratios.

profitability

A change in depreciation method is accounted for by

prospectively applying the new method

The three types of accounting changes are a change in

reporting entity. accounting principle. accounting estimate.

The two approaches most commonly used to prepare an income statement are

single-step and multiple-step

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.

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

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

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

Which of the following are acceptable methods of presenting the income statement? (Select all that apply.)

Single-step format Multiple-step format

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. (Enter only one word.)

accumulated

Asset turnover ratio is net sales divided by

average total assets.

Companies have considerable flexibility in reporting income from ___________________ operations, but the reporting of income from ____________________ operations is strictly mandated. (Enter only one word per blank.)

continuing ; discontinued

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 _______________costs. (Enter only one word.)

restructuring

An inflow of resources resulting from providing goods or services to customers is a(n)

revenue

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

statement of cash flows.

In looking at earnings quality, analysts try to separate a company's __________________ earnings effects from its _________________ earnings.(Enter only one word per blank.)

temporary ; permanent

Earnings quality refers to

the ability of reported earnings to predict future earnings.

Where on the income statement is income tax expense reported?

In a separate line.

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

Non-GAAP earnings

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

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

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

True Reason: GAAP allows one income statement that includes comprehensive income or a separate statement.

Non-GAAP earnings are calculated

based on management's assumptions of permanent earnings.

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 the residual value of a depreciable asset is treated as a change in accounting _____ . (Enter only one word.)

estimate

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

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

net income less any preferred stock dividends

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

revenues

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

they are often nonrecurring.

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

False Reason: Income tax expense must be disclosed as a separate line item on the income statement.