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Chapter 12 Income and Changes in Retained Earnings Answer Key
True / False Questions
1.
An extraordinary item appears on the income statement before the section on discontinued
operations.
2.
In order for a loss on the disposal of a discontinued operation to be classified on the
income statement as a discontinued operation, it must be unusual in nature.
3.
"Discontinued operations" is an example of an extraordinary item.
4.
Discontinued operations should be shown on the statement of retained earnings net of
taxes.
5.
The expropriation (seizure of) of a multinational company's assets by a government is an
example of a discontinued operation item.
6.
Extraordinary items and the results of discontinued operations are shown in the income
statement net of any related income tax effects.
7.
The FASB has not compiled a comprehensive list of what is considered to be an
extraordinary item, thus the determination is a matter of judgment.
8.
Earnings per share is equal to net income applicable to common stock, divided by the
weighted number of common shares outstanding.
9.
In determining earnings per share when a preferred stock has dividends in arrears, only the
current year's dividend is deducted to arrive at earnings per share.
10.
While the price-earnings ratio is computed using historical earnings, it reflects investors'
expectations of future earnings.
11.
The amount of cash dividends paid to common stockholders is part of the computation of
earnings per share.
12.
Diluted earnings per share are shown to alert investors that earnings per share could be
increased by the effects of conversions of securities into common stock.
13.
Diluted earnings per share represents a hypothetical case, showing what earnings per
share would be if certain securities were converted into additional shares of common
stock.
14.
When a corporation presents both "basic" and "diluted" earnings per share, basic earnings
per share will be the smaller of the two figures.
15.
In order to receive a dividend, a stockholder must have owned the stock as of the
declaration date.
16.
A stock dividend provides a stockholder with more shares of stock, but his or her
percentage of ownership in the company is no larger than before.
17.
When a small (under 10%) stock dividend is declared, the market value of the stock is
transferred from Retained Earnings into other stockholder equity accounts.
18.
A stock split changes the par value of a stock, whereas a stock dividend does not.
19.
Stock splits are always in a 2 for 1 ratio.
20.
Stock dividends and stock splits do not cause a change in the total amount of stockholders'
equity.
21.
The amount transferred out of retained earnings when a 4% stock dividend is declared is
equal to the prevailing market value per share times the number of dividend shares to be
distributed.
22.
Large stock dividends tend to keep stock prices down.
23.
The date on a statement of retained earnings is at a point in time; such as, at December
31, 2015.
24.
A prior period adjustment to retained earnings is made when a discovery of a material error
was made to prior years' income.
25.
Prior period adjustments are shown in the financial statements by adjusting the beginning
balance of retained earnings in the statement of retained earnings.
26.
Prior period adjustments appear in the statement of retained earnings and in the income
statement for the current year.
27.
Comprehensive income differs from net income in that it includes events that are
recognized but not realized.
28.
Comprehensive income is a component of net income.
29.
Comprehensive income may be presented in a statement with net income, in a separate
statement, or as part of the notes to the financial statements.
30.
Recent rulings by the SEC now require all corporations to prepare an expanded version of
the Statement of Retained Earnings showing all equity accounts and their changes for the
last three years.
31.
A statement of stockholders' equity is not a required financial statement and need not be
prepared along with a statement of retained earnings.
32.
The statement of stockholders' equity discloses the amount of cash dividends as well as
stock dividends declared during the current year.
33.
In an attempt to appeal to investors, a company may be tempted to overstate net income.
34.
According to the Sarbanes-Oxley Act, lying to an external auditor can create a criminal
penalty as well as a civil penalty.
Multiple Choice Questions
35.
Extraordinary items are found on the income statement:
36.
Doogle Corporation sold a segment of its operations in 2014 and suffered an extraordinary
loss in 2015. Which of the following would be the most useful in attempting to predict
Doogle's performance for 2016?
37.
Execucomp Corporation's financial statements in the current year show a loss from
discontinued operations, a prior period adjustment, and an extraordinary gain. If
Execucomp's income statement is prepared according to generally accepted accounting
principles (as illustrated in your text), which of the following four items would appear
second in sequence in the income statement?
38.
Of the items listed, which would appear closest to the bottom of the income statement?
39.
The purpose of developing the subtotals "Income before Extraordinary Items" and "Income
from Continuing Operations" in an income statement is to:
40.
To qualify as an extraordinary item, a gain or loss must:
41.
Which of the following would be classified as an extraordinary item?
42.
An example of an extraordinary gain or loss is:
43.
Which of the following items would be included in the discontinued operations section of
the income statement?
44.
Family Fashions Corporation discontinued Kid-Choice, its entire line of children's clothing,
in November of 2015. Prior to the disposal, Kid-Choice generated a loss of $600,000 (net of
tax) for the period from January through the sale date. Because of the value of the real
estate and machinery, there was a gain of $850,000 (net of tax) on the actual sale. How
should this situation be reported in the financial statements of Family Fashions for 2015?
45.
Sovereign Foods suffered a $1,500,000 loss (net of tax) when the FDA prohibited the sale
of food products containing red dye no. 3. On its other products, Sovereign Foods had net
sales of $6,580,000 and costs and other expenses of $6,505,000. Which of the following
statements is
not
true? (Ignore taxes)
46.
Corona Corporation's financial statements for the current year include the following:
On the basis of this information, net income for the current year is:
47.
During the year 2015, Tosco Corporation suffered an $800,000 loss when its factory was
destroyed in a flood. Assuming the corporate income tax rate is 36%, what amount will
Tosco report as an extraordinary loss on its income statement for 2015? Assume floods are
not common in this area.
48.
Colfax Corporation's financial statements for the current year include the following:
On the basis of this information, net income for the current year is:
