1. Which one of the following events is an operating transaction?
a. Purchase of equipment
b. Payment for equipment rental
c. Purchase of land
d. Issuing bonds for cash
2. Which one of the following events is an operating transaction?
a. Payment of office supplies
b. Change in depreciation accounting principle
c. Purchase of another company for stock
d. Disposal of a business segment
3. On the income statement, the result of changing from double-declining-balance to
straight-line depreciation is found in
a. operating revenues and expenses.
b. other revenues or expenses.
c. extraordinary gains or losses.
d. cumulative effects.
4. Financing transactions include
a. exchanges with shareholders.
b. revenues.
c. expenses.
d. most transactions that impact the income statement.
5. On the income statement, the loss of equipment caused by the eruption of a volcano in
the Northeastern United States is found in
a. operating revenues and expenses.
b. extraordinary gains or losses.
c. disposal of a business segment.
d. other revenues or expenses.
6. Which one of the following events is not an operating transaction related to a company’s
primary activity?
a. Disposal of a business segment
b. Purchase of equipment
c. Payment for equipment maintenance
d. Purchase of inventory
7. All of the following are termed considered to be operating revenues or expenses that are
usual and frequent except
a. the sale of furniture by a furniture company.
b. interest expense related to financing with bonds.
c. depreciation expense on machinery.
d. delivery cost of goods .
8. Which one of the following is a nonoperating event that must be reported on the income
statement?
a. Acquisition of a plant asset to be used in operations
b. Extraordinary items
c. Recognition of inventory expense
d. Consumption of office supplies
9. Non-operating items are found in the
a. asset section of the balance sheet.
b. liability section of the balance sheet.
c. cash flows from operations section of the cash flow statement.
d. income statement.
Test Bank – Chapter 13 – The Complete Income Statement 13-3
10. A summary of operating events is found
a. only in the asset section of the balance sheet.
b. only in the investment and financing sections of the cash flow statement.
c. only in the cash flows from operations section of the cash flow statement.
d. only in the income statement.
e. in the cash flows from operations section of the cash flow statement, and in the
income statement.
11. Operating events include
a. the payment of dividends and accounting principle changes.
b. inflows and outflows of assets due to the generation of revenues.
c. purchases, sales, and exchanges of long-term assets.
d. expenses and costs of acquiring plant assets .
12. On the income statement, interest revenue is found in
a. operating revenues and expenses.
b. other revenues or expenses.
c. the disposal of a business segment section.
d. the extraordinary gains or losses section.
e. the cumulative effects section.
13. On the income statement, marketing expenses are reported as
a. operating revenues and expenses.
b. other revenues or expenses.
c. the disposal of a business segment.
d. an extraordinary gain or loss.
e. a cumulative effect.
14. On the income statement, a gain from the sale of stock is reported as
a. operating revenues and expenses.
b. other revenues or expenses.
c. a disposal of a business segment.
d. an extraordinary gain or loss.
e. a cumulative effect of a change in accounting principle.
15. On the income statement, the loss from selling an independent business component of
the company is reported as a(n)
a. operating revenue or expense.
b. other revenue or expense.
c. disposal of a business segment.
d. extraordinary gain or loss.
16. Which of the following statements is false regarding diluted earnings per share?
a. Reporting diluted earnings per share is required by GAAP when potentially
significant dilution of EPS exists.
b. Diluted earnings per share can be used to reflect the extent of potential share
dilution.
c. Diluted earnings per share is not reported by some companies.
d. Diluted earnings per share is always the same as basic earnings per share.
17. Recognition of bad debt expense is an event considered to be
a. an operating activity cash flow.
b. both unusual and infrequent.
c. neither unusual nor infrequent.
d. a financing cash flow.
18. On the income statement, the result of selling equipment is reported as a(n)
a. operating revenue or expense.
b. other revenue or expense.
c. disposal of a business segment.
d. extraordinary gain or loss.
Test Bank – Chapter 13 – The Complete Income Statement 13-5
e. cumulative effect of a change in accounting principle.
19. On the income statement, interest expense is reported as a(n)
a. operating revenue or expense.
b. other revenue or expense.
c. disposal of a business segment.
d. extraordinary gain or loss.
e. cumulative effect of a change in accounting principle.
20. On the income statement, usual and frequent income events are found in
a. operating revenues and expenses.
b. other revenues or expenses.
c. disposal of a business segment.
d. extraordinary gains or losses.
e. cumulative effects.
21. On the income statement, unusual OR infrequent income events are found in
a. operating revenues and expenses.
b. other revenues or expenses.
c. disposal of a business segment.
d. extraordinary gains or losses.
e. cumulative effects.
22. Which one of the following is true about earnings per share?
a. Must be calculated as earnings per ‘preferred’ share
b. Must be calculated as earnings per ‘common’ share
c. May be increased or decreased because of outstanding stock options or convertible
debt
d. Appears with the gross profit percentage on the income statement
23. Below are five categories of transaction. Generally accepted accounting principles
consider which of these as financing transactions?
1. Purchases, sales, and exchanges of assets
2. Exchanges with shareholders
3. Operating transactions like revenues and expenses
4. Exchanges of liabilities and shareholders’ equity
5. Issues and payments of debt
a. 1 only.
b. 3, 4, and 5.
c. 1,2, and 3.
d. 2,4,and 5.
24. Which one of the following should be NOT reported net of income taxes?
a. Loss from early extinguishment of long-term debt
b. Cumulative adjustments resulting from a change in depreciation methods
c. Bad debt expense associated with a bankrupt customer
d. Gains or loss from discontinuing the operations of a major segment of a business
25. Which one of the following transactions or events is never treated as an extraordinary
item?
a. Losses from the early extinguishment of long-term bonds
b. Losses from flooding in locations where flooding is uncommon and has never
occurred before
c. Operating losses from the discontinued segment of a business
d. Losses from volcanic eruptions in Kansas
26. Mountain Corp. experienced the following events and transactions during 2010:
1 = Dividends declared and paid to Mountain’s shareholders
2 = Cumulative change from FIFO to average cost of inventory
3 = Gain on disposal of a major segment of the business
4 = Depreciation expense
5 = Gain from early debt retirement
Using the numbers of the events and transactions, identify which of the following
sequences is the correct order for presenting the items on the income statement.
a. 5, 1, 3, 2
b. 4, 3, 5, 2
Test Bank – Chapter 13 – The Complete Income Statement 13-7
c. 4, 5, 2, 3
d. 1, 4, 3, 5, 2
27. Management of Walker Corporation chose to classify its major losses as extraordinary
items. Managers might be biased toward this approach because
a. investors do not use extraordinary items when predicting future performance.
b. this treatment reduces income taxes.
c. extraordinary losses are considered a good predictor of the company’s future
solvency.
d. extraordinary losses bypass net income and are reported directly as part of
comprehensive income.
28. If a loss is unusual in nature but not infrequent in occurrence, the loss should be
disclosed
a. as an extraordinary item, net of taxes.
b. in the footnotes.
c. as a separate component of income from continuing operations.
d. as a separate item after the extraordinary items, net of taxes.
29. Carman, Inc. properly reported a change in accounting principle during 2009. This
company must
a. have violated GAAP by not applying accounting principles consistently.
b. have convinced its auditors that the environment in which it operates has changed
and another method is more appropriate.
c. be trying to cover up accounting errors.
d. have initially used the wrong method.
30. Publicly held companies must disclose earnings per share for all of the following except for
a. income from continuing operations.
b. losses from discontinued segments of a business.
c. other revenue and expense items.
d. cumulative effects resulting from changes in accounting principles.
31. Comprehensive income
a. may be reported on a separate statement or on the face of the income statement.
b. can be used as an alternative format of the traditional income statement.
c. includes some revenue and expense items that are part of continuing operations.
d. can be prepared instead of the shareholders’ equity section of the balance sheet.
32. Paulson, Inc. reported net income of $60,000 during 2015. Throughout 2015, 20,000
shares of common stock and 5,000 shares of preferred stock were outstanding. The
preferred stock has no dividend preference. Evans reported earnings only for continuing
operations items. How much is earnings per share for 2015?
a. $3.00
b. $12.00
c. $2.00
d. Not enough information is provided.
33. Intraperiod tax allocation
a. is applied to each income statement item to provide creditors and investors a better
indication of the company’s true revenues and expenses.
b. is a method of allocating income taxes over multiple accounting periods.
c. is applied only to revenues since expenses are not taxed.
d. is applied to net income from continuing operations.
34. Which one of the following items is considered part of comprehensive income but not
reported as part of net income?
a. Accounting principle changes
b. Foreign currency translation adjustments
c. Gain on sale of land
d. Dividend revenue
35. Why is income so important to both investors and stock analysts?
a. It is strongly correlated to the market price of stock and bond prices.
b. It is equal to the amount that shareholders will receive as dividends.
c. Income is tied directly to revenue, i.e., a company that reports a large amount of
revenue will always report a large amount of income.
d. It identifies if the company will be able to pay its current debts when they become
due.
36. Which one of the following is true concerning discontinued operations?
a. It relates primarily to product changes in a company.
b. The gain or loss associated with the disposal is shown separately as a component of
continuing operations on the income statement.
c. It is reported with ‘other revenues and losses’ on the company’s income statement.
d. One of two separate disclosures required is income or loss from the segment’s
operations from the beginning of the current accounting period to the date of
disposal.
37. An income statement prepared with separate components
a. enables users to distinguish transactions that are due to operations from those that
are not useful as predictors of future performance.
b. is prepared for income items that are frequent and usual.
c. is used primarily by companies involved with complex financing transactions.
d. may replace a statement of cash flows.
.
38. Diluted earnings per share
a. is required for companies that have the potential for liquidation.
b. is a financing and investing activity.
c. shows the effects of possible increases in the number of outstanding common
shares.
d. is reported for the ‘other revenues and expenses’ category on the income statement.
39. A company should report a cumulative effect of an accounting principle change when
a. consistency has been violated.
b. errors are made and subsequently corrected.
c. FASB mandates a change from one method to another.
d. international reporting standards differ from GAAP methods.
40. One objective of financial reporting is to provide information that is
a. helpful in assessing the amounts, timing, and uncertainty of future cash flows.
b. useful for competitors who need to assess economic activities.
c. a forecast of future operations.
d. unavailable to management.
41. Changes in accounting methods must be disclosed in three prominent places. These are
a. the auditor’s report, financial statement notes, and the balance sheet.
b. financial statement notes, the income statement, and the auditor’s report.
c. the balance sheet, the income statement, and the statement of cash flows.
d. notes to financial statements, the management letter, and the income statement.
43. Makar Corporation reported net income before extraordinary items and taxes of
$200,000 for the year 2015. During 2015, the average number of common shares
outstanding was 35,000. Basic net earnings per share for 2015 are reported to be only
$2.00. Makar’s income tax rate is 30%. How much was Makar’s extraordinary gain or
loss (before tax) from a major earthquake? The earthquake was the only item that was
reported net of tax in the income statement for 2015.
a. $70,000.
b. $100,000.
c. $130,000.
d. none of the above
44. Anderson Industries has the following transactions reported in the financial statements:
1. Income effect due to changing from the double-declining balance method to the
straight-line method of depreciation.
2. Collection of accounts receivable.
3. Purchase of an insurance policy on December 31 that provides coverage for the
following year.
4. Accrued wages earned by the employees.
5. Estimated uncollectible accounts receivable using the aging method.
6. Recognized a gain on the sale of plant equipment.
Which of the above transactions would be considered as “usual and frequent” for income
statement purposes?
a. Transactions 1, 2, 3, 4, & 5
b. Transactions 4 & 5
c. Transactions 4, 5 & 6
d. All transactions 1 through 6
45. Anderson Industries has the following transactions reported in the financial statements:
1. Income effect due to changing from the double-declining balance method to the
straight-line method of depreciation.
2. Collection of accounts receivable.
3. Purchase of an insurance policy on December 31 that provides coverage for the
following year.
4. Accrued wages earned by the employees.
5. Estimated uncollectible accounts receivable using the aging method.
6. Recognized a gain on the sale of plant equipment.
Which of the above transactions would be considered as “unusual or infrequent” for
income statement purposes?
a. Transactions 1, 5, & 6
b. Transactions1, 3, & 6
c. Transaction 6
d. All transactions 1 through 6
46. Damron Inc. has the following transactions reported in the financial statements:
1. Recognized a loss when the government expropriated land to build a bridge.
2. Declared a dividend valued at $100,000.
3. A lender covenant required the company to appropriate a portion of retained
earnings.
4. Received dividends on stocks held as short-term investments. The dividends were
declared and paid on the same day.
5. Recognized the cost of inventory sold during the year under the periodic method.
6. The company paid rent for the current year.
Which of the above transactions would be included on the company’s statement of
shareholders’ equity?
a. Transactions 2 & 4
b. Transactions 1, 2, 3, & 4
c. Transactions 2 & 3
d. All transactions 1 through 6
47. Damron Inc. has the following transactions reported in the financial statements:
1. Recognized a loss when the government expropriated land to build a bridge.
2. Declared a dividend valued at $100,000.
3. A lender covenant required the company to appropriate a portion of retained
earnings.
4. Received dividends on stocks held as short-term investments. The dividends were
declared and paid on the same day.
5. Recognized the cost of inventory sold during the year under the periodic method.
6. The company paid rent for the current year.
Which of the above transactions would be considered as “usual and frequent” for income
statement purposes?
a. Transactions 2, 4, 5, & 6
b. Transactions 2 through 6
c. Transactions 4, 5, & 6
d. Transactions 5 & 6
48. Damron Inc. has the following transactions reported in the financial statements:
1. Recognized a loss when the government expropriated land to build a bridge.
2. Declared a dividend valued at $100,000.
3. A lender covenant required the company to appropriate a portion of retained
earnings.
4. Received dividends on stocks held as short-term investments. The dividends were
declared and paid on the same day.
5. Recognized the cost of inventory sold during the year under the periodic method.
6. The company paid rent for the current year.
Which of the above transactions would be considered as “unusual or infrequent” for
income statement purposes?
a. Transaction 1
b. Transaction 3
c. Transaction 4
d. None of these transactions
49. Damron Inc. has the following transactions reported in the financial statements:
1. Recognized a loss when the government expropriated land to build a bridge.
2. Declared a dividend valued at $100,000.
3. A lender covenant required the company to appropriate a portion of retained
earnings.
4. Received dividends on stocks held as short-term investments. The dividends were
declared and paid on the same day.
5. Recognized the cost of inventory sold during the year under the periodic method.
6. The company paid rent for the current year.
Which of the above transactions would be considered as “unusual and infrequent” for
income statement purposes?
a. Transactions 1 & 4
b. Transaction 1
c. Transactions 1 & 3
d. None of these transactions
50. Sunrise Designs maintains a credit line with Ohio River Bank that allows the company to
borrow up to $1 million. A covenant associated with the loan contract limits the
company’s dividends in any one year. The 2015 income statement data for the
company is as follows:
Net sales
$840,000
Less: Cost of goods sold
500,000
Gross profit
$340,000
Selling and administrative expenses
120,000
Net operating income
$220,000
Gain on sale of securities
24,000
Interest expense
(4,000)
Net income from continuing operations before tax
$240,000
Less: Income tax
51,200
Net income from continuing operations
$188,800
Extraordinary gain (net of tax)
22,000
Net income before change in accounting principle
$210,800
Income effect due to change in accounting principle
52,000
Net income
$262,800
What is the maximum amount of dividends Sunrise can pay if the covenant associated
with the credit line is expressed as 20 percent of net income?
a. $55,000
b. $60,000
c. $52,560
d. $53,700
Solution:
51. Sunrise Designs maintains a credit line with Ohio River Bank that allows the company to
borrow up to $1 million. A covenant associated with the loan contract limits the
company’s dividends in any one year. The 2015 income statement data for the
company is as follows:
Net sales
$840,000
Less: Cost of goods sold
500,000
Gross profit
$340,000
Selling and administrative expenses
120,000
Net operating income
$220,000
Gain on sale of securities
24,000
Interest expense
(4,000)
Net income from continuing operations before tax
$240,000
Less: Income tax
51,200
Net income from continuing operations
$188,800
Extraordinary gain (net of tax)
22,000
Net income before change in accounting principle
$210,800
Income effect due to change in accounting principle
52,000
Net income
$262,800
What is the maximum amount of dividends Sunrise can pay if the covenant is expressed
as 20 percent of income before change in accounting principle?
a. $55,000
b. $60,000
c. $65,700
d. $42,160
Solution:
52. Sunrise Designs maintains a credit line with Ohio River Bank that allows the company to
borrow up to $1 million. A covenant associated with the loan contract limits the
company’s dividends in any one year. The 2015 income statement data for the
company is as follows:
Net sales
$840,000
Less: Cost of goods sold
500,000
Gross profit
$340,000
Selling and administrative expenses
120,000
Net operating income
$220,000
Gain on sale of securities
24,000
Interest expense
(4,000)
Net income from continuing operations before tax
$240,000
Less: Income tax
51,200
Net income from continuing operations
$188,800
Extraordinary gain (net of tax)
22,000
Net income before change in accounting principle
$210,800
Income effect due to change in accounting principle
52,000
Net income
$262,800
What is the maximum amount of dividends Sunrise can pay if the covenant is expressed
as 20 percent of income before extraordinary items and change in accounting principle?
a. $37,760
b. $60,000
c. $65,700
d. $52,700
Solution:
53. Sunrise Designs maintains a credit line with Ohio River Bank that allows the company to
borrow up to $1 million. A covenant associated with the loan contract limits the
company’s dividends in any one year. The 2015 income statement data for the
company is as follows:
Net sales
$840,000
Less: Cost of goods sold
500,000
Gross profit
$340,000
Selling and administrative expenses
120,000
Net operating income
$220,000
Gain on sale of securities
24,000
Interest expense
(4,000)
Net income from continuing operations before tax
$240,000
Less: Income tax
51,200
Net income from continuing operations
$188,800
Extraordinary gain (net of tax)
22,000
Net income before change in accounting principle
$210,800
Income effect due to change in accounting principle
52,000
Net income
$262,800
What is the maximum amount of dividends Sunrise can pay if the covenant is expressed
as 20 percent of net operating income?
a. $44,000
b. $60,000
c. $47,200
d. $52,700
Solution:
54. Gleeson Industries consists of four separate divisions: compressed wood products,
chemicals, stone products, and plastics. On March 15, 2015, Gleeson sold the
chemicals division for $625,000 cash. Financial information related to the chemicals
division follows:
$175,000
160,000
$15,000
$1,850,000
1,400,000
The journal entry to record the sale of the chemicals division will include:
a. a debit to Loss on Disposal of Business Segment for $175,000.
b. a debit to Assets for $1,850,000.
c . a debit to Extraordinary Gain for $175,000.
d. a credit to Gain on Disposal of Business Segment for $175,000.
Solution: