chapter 5: income statement
Which of the following statements about earnings quality is false? A) Earnings quality is enhanced when managers are afforded discretion and judgment in applying accounting standards. B) Permanent earnings result in higher earnings quality, while transitory earnings result in lower earnings quality. C) Earnings quality is of considerable interest not only to investors and creditors but also to auditors, regulators, and academics. D) Earnings quality captures the degree to which reported income provides financial statement users with useful information for predicting future firm performance.
A) Earnings quality is enhanced when managers are afforded discretion and judgment in applying accounting standards.
Which of the following is considered to be a limitation of income statements? A) Income statements depend on accounting methods selected. B) Income statements evaluate past performance. C) Income statements assess uncertainties of achieving future cash flows. D) Income statements predict future performance.
A) Income statements depend on accounting methods selected.
Which of the following is an advantage of the two-statement approach to reporting other comprehensive income (OCI)? A) Net income retains its emphasis as the primary income measure. B) Other comprehensive income is more heavily emphasized when presented in its own statement. C) Companies apply the tax effects to OCI in total in the one-statement approach but to each individual item in the two-statement approach, thereby enhancing usefulness. D) The two-statement approach is significantly less costly to prepare.
A) Net income retains its emphasis as the primary income measure.
Which of the following is a classification of expenses using the functional approach? A) administration expense B) cost of raw materials used C) supplies expense D) salary costs
A) administration expense
The portion of income (loss) attributable to the noncontrolling interest is ________. A) closed to noncontrolling interest in the equity section B) closed to retained earnings in the equity section C) closed to other comprehensive income in the equity section D) not closed to the equity section
A) closed to noncontrolling interest in the equity section
Which of the following is not an account type reported in the statement of stockholders' equity? A) comprehensive income B) noncontrolling interest C) treasury stock D) contributed capital
A) comprehensive income (ON THE IS)
Which of the following is the key performance measure reported on the income statement that is typically presented last in sequence? A) earnings per share B) income from continuing operations C) net income D) operating income
A) earnings per share
Which of the following is NOT a subtotal on the multi-step income statement? A) income from discontinued operations B) gross profit C) operating income D) income before tax
A) income from discontinued operations
Which of the following items does IFRS require to be disclosed but not necessarily presented on the income statement? A) litigation settlements B) finance costs C) turnover D) income of associates
A) litigation settlements
Companies report earnings per share for all of the following except ________. A) operating income B) net income C) continuing operations D) discontinued operations
A) operating income
Which of the following is NOT typically included in the determination of income from continuing operations? A) other comprehensive income (OCI) B) income tax provision C) non-operating items D) earnings before interest and taxes
A) other comprehensive income
Which of the following income statement elements is an economic inflow that occurs from primary operations? A) revenue B) comprehensive income C) gain D) net income
A) revenue
The noncontrolling interest line item on the income statement represents ________. A) the portion of the subsidiary owned by others, which is deducted to determine net income B) the portion of the subsidiary owned by the reporting entity, which is added to determine net income C) the portion of earnings owned by the reporting entity, which is deducted to determine net income D) the portion of earnings that belongs to others, which is added to determine net income
A) the portion of the subsidiary owned by others, which is deducted to determine net income
Which of the following is considered to be a characteristic of the usefulness of income statements? A) Income statements require judgment. B) Income statements evaluate past performance. C) Income statements depend on the accounting methods selected. D) Income statements exclude unreliable information.
B) Income statements evaluate past performance.
Which of the following is NOT a characteristic that must be considered when determining that a business activity is a component of an entity for purposes of classifying that activity as a DISCO-OP? A) The activity comprises operations and cash flows. B) The activity constitutes a strategic advantage. C) The activity can be clearly distinguished for financial reporting purposes. D) The activity is a portion of the entity.
B) The activity constitutes a strategic advantage.
When a company remeasures the value of a discontinued operation, a value adjustment is made to recognize ________. A) a loss, but not a gain, for the difference between book value of the net assets and their fair value. B) a loss, but not a gain, for the difference between book value of the net assets and their fair value net of selling costs. C) the gain or loss for the difference between book value of the net assets and their fair value. D) the gain or loss for the difference between book value of the net assets and their fair value net of selling costs.
B) a loss, but not a gain, for the difference between book value of the net assets and their fair value net of selling costs.
Companies use ________ income statements when a large number of line items distracts the user from identifying key measures and relationships. A) comprehensive B) condensed C) single step D) multi-step
B) condensed
Which of the following is not an account type reported in the statement of stockholders' equity? A) accumulated other comprehensive income B) controlling interest C) treasury stock D) contributed capital
B) controlling interest (IT IS ON THE BS)
Which of the following income statement elements is an economic outflow that occurs from primary operations? A) loss B) expense C) revenue D) deficit
B) expense
Which of the following items does IFRS require to be presented on the income statement that U.S. GAAP does not require? A) litigation settlements B) finance costs C) after-tax profit or loss on discontinued operations D) restructuring costs
B) finance costs
On May 1, Jonson Industries decided to discontinue its prepackaged business segment. At the end of the year, the company is still holding the business segment for disposal, which is expected early in the following year. On its year-end income statement, Jonson Industries will report as income from discontinued operations the profits generated by the prepackaged business segment ________. A) for the entire year, before taxes B) for the entire year, net of taxes C) since May 1, before taxes D) since May 1, net of taxes
B) for the entire year, net of taxes
Which of the following is typically included in the determination of income from continuing operations? A) other comprehensive income B) non-operating gains and losses C) gain on disposal of discontinued segment D) reserved retained earnings
B) non-operating gains and losses
Which of the following is a classification of expenses using the nature approach? A) cost of goods sold B) postage expense C) sales expense D) administration expense
B) postage expense
What is the most common approach to earnings management? A) manipulate revenues and gains B) rearrange expenses and losses C) exploit business combinations D) engage in fraudulent activity
B) rearrange expenses and losses
Which of the following is typically included in the income tax provision? A) deferred income tax B) state and local income tax C) federal income tax on gain from discontinued operations D) federal, state, and local payroll tax
B) state and local income tax
If a company writes down the net assets of a discontinued operation from original carrying value to a remeasurement of fair value in one year, then in the next year the fair value changes ________. A) the company will recognize any subsequent loss or gain for the difference between new fair value and prior year remeasured fair value B) the company will recognize any subsequent loss but limited gains up to the original carrying value before re-measurement C) the company will recognize any subsequent loss but no gains for the difference between new fair value and prior year remeasured fair value D) the company cannot recognize any subsequent loss or gain
B) the company will recognize any subsequent loss but limited gains up to the original carrying value before re-measurement
Which of the following transactions is not reported as other comprehensive income according to U.S. GAAP? A) unrealized gains and losses from available-for-sale portfolio of investment securities B) unrealized gains on the upward valuation of property, plant, and equipment C) adjustments to unrecognized pension costs (benefits) D) foreign currency translation gains and losses
B) unrealized gains on the upward valuation of property, plant, and equipment
There is a noncontrolling interest when ________. A) a company uses the equity method to account for ownership of another company B) a company owns less than 50% of another company but exercises significant control C) a company controls another company but owns less than 100% of that other company D) a company is owned by others outside the company
C) a company controls another company but owns less than 100% of that other company
Which of the following is an earnings management technique that involves increasing a current loss to show a future increase in net income? A) inversion B) comprehensive counting C) big bath D) cookie jar reserves
C) big bath
Which of the following is the key performance measure reported on the income statement that is typically presented first in sequence? A) sales revenue B) income from continuing operations C) gross profit D) operating income
C) gross profit
Which of the following is typically included in the determination of operating income? A) other comprehensive income B) provision for income tax C) gross profit D) restructuring charges
C) gross profit
6) Which of the following income statement items is considered to be permanent? A) gains on disposal of equipment B) impairment losses C) interest expense D) discontinued operations
C) interest expense
Which of the multi-step income statement reports revenues and expenses related to secondary operations of the entity? A) discontinued operations section B) secondary section C) non-operating section D) operating section
C) non-operating section
Each of the following is a motivation to engage in earnings management except ________. A) beat benchmarks B) avoid reporting a loss C) separate other comprehensive income from net income D) present a smooth, upwards trend in earnings
C) separate other comprehensive income from net income
Which of the following transactions is NOT reported as OCI by either U.S. GAAP or IFRS? A) gains and losses from foreign currency translation B) adjustments to unrecognized pension costs (benefits) C) unrealized gains and losses from trading securities D) unrealized gains and losses from derivatives classified as cash flow hedges
C) unrealized gains and losses from trading securities
Which of the following transactions will most likely result in a loss reported on the income statement? A) A shoe store acquires a large supply of shoe polish from a supplier going through bankruptcy. B) A manufacturer pays a company a fee to license that company's proprietary technology. C) A bank pays more interest than expected on customers savings accounts. D) A grocery store sells marketable securities after a decline in value.
D) A grocery store sells marketable securities after a decline in value.
How is reporting for other comprehensive income (OCI) different between U.S. GAAP and IFRS? A) U.S. GAAP allow either a one-statement approach or a two-statement approach while IFRS require a two-statement approach using the direct method. B) U.S. GAAP allow either a one-statement approach or a two-statement approach while IFRS require a two-statement approach and allow more items to be classified as OCI. C) Both U.S. GAAP and IFRS allow either a one-statement approach or a two-statement approach while IFRS require the direct method. D) Both U.S. GAAP and IFRS allow either a one-statement approach or a two-statement approach while IFRS allow more items to be classified as OCI.
D) Both U.S. GAAP and IFRS allow either a one-statement approach or a two-statement approach while IFRS allow more items to be classified as OCI.
Which of the following is NOT a drawback of the single-step income statement? A) It does not separate operating and non-operating items. B) It combines revenues and gains without classification. C) It does not classify expenses by function. D) It misrepresents net income due to oversimplification.
D) It misrepresents net income due to oversimplification.
Which of the following is FALSE concerning the statement of stockholders' equity? A) IFRS require a statement of stockholders' equity. B) U.S. GAAP do not require a statement of stockholders' equity. C) Net income and dividends close into Retained Earnings. D) OCI and retirement of repurchased shares close into Accumulated OCI.
D) OCI and retirement of repurchased shares close into Accumulated OCI.
Evaluating whether the disposal of a component of an entity constitutes a discontinued operation begins with ________. A) remeasuring the value of net assets held for disposal B) identifying the cash flows that can be clearly distinguished operationally C) segregating its operating revenues and expenses from those of continuing operations D) assessing whether a strategic shift has occurred
D) assessing whether a strategic shift has occurred
Which of the following income statement items is considered to be transitory? A) promotional costs for a new product B) sales revenue from the general public C) interest expense on short-term loans D) income from discontinued operations
D) income from discontinued operations
Morton Company has the following transactions in the current year. Assuming that all of the transactions are material, which of them will most likely have NO effect on current year net income? A) advance in technology that renders certain inventory items obsolete B) retirement of callable bonds at a premium C) sale of used equipment that had been fully depreciated in prior years D) increase in the fair value of certain available-for-sale securities held as an investment
D) increase in the fair value of certain available-for-sale securities held as an investment
The "cookie jar reserves" earnings management technique involves ________. A) increasing earnings in the current period in anticipation of significant future decreases B) decreasing losses in the current period to allow the firm to show increased net income in the future C) increasing earnings so as to increase managers' compensation D) increasing losses in the current period to allow the firm to show increased net income in the future
D) increasing losses in the current period to allow the firm to show increased net income in the future
When a company decides to discontinue an operation, it values the assets and liabilities of that operation at ________. A) gross book value (historical cost) B) net book value (historical cost less accumulated depreciation) C) gross current value (fair value) D) net current cost (fair value less selling costs)
D) net current cost (fair value less selling costs)
On the income statement, ________ is gross profit less all operating expenses. A) retained earnings B) net income C) income from continuing operations D) operating income
D) operating income
