CHAPTER 4
INCOME STATEMENT AND RELATED INFORMATION
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
Answer No. Description
MULTIPLE CHOICE—Conceptual
Answer No. Description
Test Bank for Intermediate Accounting, Seventeenth Edition
4 – 2
MULTIPLE CHOICE—Conceptual (cont.)
Answer No. Description
MULTIPLE CHOICE—Computational
Answer No. Description
Income Statement and Related Information
4 – 3
MULTIPLE CHOICE—Computational (cont.)
MULTIPLE CHOICE—CPA Adapted
Answer No. Description
Test Bank for Intermediate Accounting, Seventeenth Edition
4 – 4
BRIEF EXERCISES
Item Description
BE4-100 Definitions.
BE4-101 Terminology.
BE4-102 Income statement disclosures.
EXERCISES
Item Description
E4-103 Calculate net income from change in stockholders’ equity.
E4-104 Calculate net income from change in stockholders’ equity.
E4-105 Income computations.
E4-106 Income statement classifications.
E4-107 Income statement relationships.
E4-108 Multiple-step income statement.
E4-109 Multiple-step income statement.
E4-110 Income computations.
E4-111 Multiple-step income statement.
E4-112 Classification of income and retained earnings statement items.
PROBLEMS
Item Description
P4-113 Multiple-step income statement.
P4-114 Income statement form.
P4-115 Multiple-step income statement.
P4-116 Single-step income statement.
P4-117 Income statement and retained earnings statement.
P4-118 Unusual items and financial statements.
CHAPTER LEARNING OBJECTIVES
1. Identify the uses and limitations of an income statement.
2. Describe the content and format of the income statement.
3. Discuss how to report various income items.
4. Explain the reporting of accounting changes and errors.
5. Describe related stockholders equity statements.
6. Compare the accounting procedures for income reporting under GAAP and IFRS.
Income Statement and Related Information
4 – 5
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Item
LO
BT
Item
BT
Item
BT
Item
BT
Item
LO
BT
TRUE-FALSE STATEMENTS
1
K
5.
2
K
9.
2
K
13.
3
K
17.
4
K
1
C
6.
2
C
10.
3
K
14.
3
K
18.
5
K
1
K
7.
3
K
11.
3
K
15.
3
C
19.
5
K
2
K
8.
2
C
12.
3
K
16.
3
K
20.
5
K
MULTIPLE CHOICE QUESTIONS
2
K
37.
2
K
53.
4
C
69.
3
AP
85.
5
AP
1
K
38.
2
C
54.
4
AP
70.
3
AP
86.
5
AP
1
K
39.
3
C
55.
3
K
71.
3
AP
87.
5
AP
1
AP
40.
3
K
56.
3
K
72.
3
AP
88.
5
AP
1
K
41.
3
K
57.
5
K
73.
3
AP
89.
5
AP
2
K
42.
3
K
58.
5
K
74.
3
AP
90.
2
AP
2
AP
43.
3
K
59.
5
K
75.
3
AP
91.
2
AP
2
AP
44.
3
K
60.
5
K
76.
3
AP
92.
2
AP
2
AN
45.
3
K
61.
5
K
77.
3
AP
93.
2
AP
2
AN
46.
3
C
62.
2
AP
78.
3
AP
94.
2
AP
2
K
47.
3
K
63.
2
AP
79.
3
AP
95.
3
AP
2
K
48.
3
K
64.
2
AP
80.
5
AP
96.
3
AP
2
K
49.
3
K
65.
2
AP
81.
5
AP
97.
3
AP
2
C
50.
3
K
66.
2
AP
82.
5
AP
98.
3
AP
3
AN
51.
4
K
67.
2
AP
83.
5
AP
99.
4
C
3
AN
52.
5
K
68.
2
AP
84.
5
AP
BRIEF EXERCISES
1, 3,
4
K
101.
1, 3,
4, 5
K
102.
1, 2,
K
EXERCISES
1
AN
105.
2, 3
AP
107.
2
AN
109.
2
AP
111.
2, 3
AP
1
AN
106.
2
C
108.
2
C
110.
2, 3
AP
112.
3, 4
C
PROBLEMS
2,4
AP
115.
2–4
AN
117.
2–5
AP
3
AP
116.
2–4
AN
118.
3, 4
AN
Test Bank for Intermediate Accounting, Seventeenth Edition
4 – 6
TRUE-FALSE—Conceptual
1. The income statement is useful in assessing the risk or uncertainty of achieving future cash
flows.
2. A strength of the income statement as compared to the balance sheet is that items which
cannot be measured reliably can be reported in the income statement.
3. Earnings management generally makes income statement information more useful for
predicting future earnings and cash flows.
4. The transaction approach of income measurement focuses on the income-related activities
that have occurred during the period.
5. Companies frequently report income tax expense separately as the last item before net
income on a single-step income statement.
6. Revenues and gains increase both net income and owners’ equity.
7. The phrase “income from continuing operations” is used only when gains or losses on
discontinued operations occur.
8. The primary advantage of the multiple-step format lies in the simplicity of presentation and
the absence of any implication that one type of revenue or expense item has priority over
another.
9. Gross profit and income from operations are reported on a multiple-step but not on a single-
step income statement.
Income Statement and Related Information
4 – 7
10. The accounting profession has adopted a current operating performance approach to
income reporting.
11. Companies report the results of operations of a component of a business that will be
disposed of separately from continuing operations.
12. Noncontrolling interest is the portion of equity (net assets) interest in a subsidiary not
attributable to the parent company.
13. Discontinued operations, and unusual gains and losses are both reported net of tax in the
income statement.
14. Intraperiod tax allocation relates the income tax expense of a fiscal period to the specific
items that give rise to the amount of the tax provision.
15. A company that reports a discontinued operation item must report per share amounts for
this item.
16. Dividends declared on common and preferred stock are subtracted from net income in the
computation of earnings per share.
17. Prior period adjustments can either be added or subtracted in the Retained Earnings
Statement.
18. Companies often restrict retained earnings to comply with contractual requirements or
current necessity.
19. Comprehensive income includes all changes in equity during a period except those
resulting from distributions to owners.
Test Bank for Intermediate Accounting, Seventeenth Edition
4 – 8
20. The components of other comprehensive income can be reported in the statement of
comprehensive income.
True False Answers—Conceptual
MULTIPLE CHOICE—Conceptual
21. The major elements of the income statement are
a. revenue, cost of goods sold, selling expenses, and general expense.
b. operating section, nonoperating section, discontinued operations, and cumulative
effect.
c. revenues, expenses, gains, and losses.
d. revenues, irregular items, and general expenses.
22. Which of the following is not true about the information provided in the income statement?
a. It helps in evaluating the past performance of the enterprise.
b. It provides a basis for predicting future performance.
c. It helps assess the risk or uncertainty of achieving future cash flows.
d. It helps in evaluating working capital.
23. Which of the following is false about an income statement?
a. Items that cannot be measured reliably are not reported in the income statement.
b. It is used to measure the solvency of a company.
c. Income measurement involves judgment.
d. Income numbers are affected by the accounting methods employed.
S24. Which of the following would represent the least likely use of an income statement
prepared for a business enterprise?
a. Use by customers to determine a company’s ability to provide needed goods and
services.
b. Use by labor unions to examine earnings closely as a basis for salary discussions.
c. Use by government agencies to formulate tax and economic policy.
d. Use by investors interested in the financial position of the entity.
Income Statement and Related Information
4 – 9
S25. The income statement reveals
a. resources and equities of a firm at a point in time.
b. resources and equities of a firm for a period of time.
c. net earnings (net income) of a firm at a point in time.
d. net earnings (net income) of a firm for a period of time.
26. The income statement provides investors and creditors with information to predict all of
the following except the:
a. amount of future cash flows.
b. sources of future cash flows.
c. timing of future cash flows.
d. uncertainty of future cash flows.
27. Which of the following is an example of managing earnings down?
a. Changing estimated bad debts from 3 percent to 2.5 percent of sales.
b. Revising the estimated life of equipment from 10 years to 8 years.
c. Not writing off obsolete inventory.
d. Reducing research and development expenditures.
28. Which of the following is an example of managing earnings up?
a. Decreasing estimated salvage value of equipment.
b. Writing off obsolete inventory.
c. Underestimating warranty claims.
d. Accruing a contingent liability for an ongoing lawsuit.
29. What might a manager do during the last quarter of a fiscal year if she wanted to improve
current annual net income?
a. Increase research and development activities.
b. Relax credit policies for customers.
c. Delay shipments to customers until after the end of the fiscal year.
d. Delay purchases from suppliers until after the end of the fiscal year.
30. What might a manager do during the last quarter of a fiscal year if she wanted to decrease
current annual net income?
a. Delay shipments and sales to customers until after the end of the fiscal year.
b. Relax credit policies for customers.
c. Pay suppliers all amounts owed.
d. Delay purchases from suppliers until after the end of the fiscal year.
Test Bank for Intermediate Accounting, Seventeenth Edition
4 – 10
31. Which of the following is an advantage of the single-step income statement over the
multiple-step income statement?
a. It reports gross profit for the year.
b. Expenses are classified by function.
c. It matches costs and expenses with related revenues.
d. It does not imply that one type of revenue or expense has priority over another.
32. The single-step income statement emphasizes
a. the gross profit figure.
b. total revenues and total expenses.
c. operating and non-operating expenses.
d. the various components of income from continuing operations.
33. Which of the following is an not acceptable method of presenting the income statement?
a. A single-step income statement
b. A multiple-step income statement
c. A consolidated statement of income
d. A partial statement of income.
34. Which of the following is not a generally practiced method of presenting the income
statement?
a. Including prior period adjustments in determining net income
b. The single-step income statement
c. The consolidated statement of income
d. Including gains and losses from discontinued operations of a component of a business
in determining net income
35. The occurrence which most likely would have no effect on 2020 net income (assuming
that all amounts involved are material) is the
a. sale in 2020 of an office building contributed by a stockholder in 1989.
b. collection in 2020 of a receivable from a customer whose account was written off in
2019 by a charge to the allowance account.
c. settlement based on litigation in 2020 of previously unrecognized damages from a
serious accident that occurred in 2018.
d. worthlessness determined in 2020 of stock purchased on a speculative basis in 2016.
Income Statement and Related Information
4 – 11
S36. The occurrence that most likely would have no effect on 2020 net income is the
a. sale in 2020 of an office building contributed by a stockholder in 1967.
b. collection in 2020 of a dividend from an investment.
c. correction of an error in the financial statements of a prior period discovered
subsequent to their issuance.
d. stock purchased in 2002 deemed worthless in 2020.
P37. Which of the following is not a selling expense?
a. Advertising expense
b. Office salaries expense
c. Freight-out
d. Store supplies consumed
P38. The accountant for the Lintz Sales Company is preparing the income statement for 2020
and the balance sheet at December 31, 2020. The January 1, 2020 merchandise
inventory balance will appear
a. only as an asset on the balance sheet.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement and as a
current asset on the balance sheet.
d. as an addition in the cost of goods sold section of the income statement and as a
current asset on the balance sheet.
39. Which of the following is true of accounting for changes in estimates?
a. A company recognizes a change in estimate by making a retrospective adjustment to
the financial statements.
b. A company accounts for changes in estimates only in the period of change, even
though it affects the future periods.
c. Changes in estimates are not carried back to adjust prior years.
d. Changes in estimates are considered as errors.
40. A change in accounting principle requires that the cumulative effect of the change for prior
periods be shown as an adjustment to:
a. beginning retained earnings of the earliest period presented.
b. net income of the period in which the change occurred.
c. comprehensive income for the earliest period presented.
d. stockholders’ equity of the period in which the change occurred.
Test Bank for Intermediate Accounting, Seventeenth Edition
4 – 12
41. Which of the following is a required disclosure in the income statement when reporting the
disposal of a component of the business?
a. The gain or loss on disposal should be reported as an unusual gain or loss.
b. Results of operations of a discontinued component should be disclosed immediately
before income from continuing operations.
c. Earnings per share from continuing operations, discontinued operations, and net
income should be disclosed on the face of the income statement.
d. The gain or loss on disposal should not be segregated, but should be reported together
with the results of continuing operations.
42. When a company discontinues an operation and disposes of the discontinued operation
(component), the transaction should be included in the income statement as a gain or loss
on disposal reported as
a. a prior period adjustment.
b. an extraordinary item.
c. an amount after continuing operations.
d. a bulk sale of plant assets included in income from continuing operations.
43. Income taxes are allocated to each of the following except
a. continuing operations.
b. discontinued operations.
c. prior period adjustments.
d. balance sheet adjustments.
44. Which of the following is true about intraperiod tax allocation?
a. It arises because certain revenue and expense items appear in the income statement
either before or after they are included in the tax return.
b. It is required for extraordinary items and cumulative effect of accounting changes but
not for prior period adjustments.
c. Its purpose is to allocate income tax expense evenly over a number of accounting
periods.
d. Its purpose is to relate the income tax expense to the items which affect the amount of
tax.
45. Companies use intraperiod tax allocation for all of the following items except
a. discontinued operations.
b. other comprehensive income.
c. changes in accounting estimates.
d. income from continuing operations.
Income Statement and Related Information
4 – 13
46. Which of the following items would be reported net of tax on the face of the income
statement?
a. Prior period adjustment
b. Unusual gain
c. Change in estimates related to allowance for doubtful accounts
d. Discontinued operations
47. Where must earnings per share be disclosed in the financial statements to satisfy
generally accepted accounting principles?
a. On the face of the statement of retained earnings (or, statement of stockholders’
equity.)
b. In the footnotes to the financial statements.
c. On the face of the income statement.
d. On the face of the balance sheet.
48. In calculating earnings per share, companies deduct preferred dividends from net income
if:
a. they are noncumulative though not declared.
b. the dividends are declared.
c. they are convertible preferred shares.
d. they are callable preferred shares.
49. Which of the following earnings per share figures must be disclosed on the face of the
income statement?
a. EPS for income before taxes.
b. The effect on EPS from unusual items.
c. EPS for gross profit.
d. EPS for income from continuing operations.
S50. Earnings per share should always be shown separately for
a. net income and gross margin.
b. net income and pretax income.
c. income from continuing operations.
d. discontinued operations items and prior period adjustments.
Test Bank for Intermediate Accounting, Seventeenth Edition
4 – 14
P51. A correction of an error in prior periods’ income will be reported
In the income statement Net of tax
a. Yes Yes
b. No No
c. Yes No
d. No Yes
52. Which of the following items will not appear in the retained earnings statement?
a. Net loss
b. Prior period adjustment
c. Discontinued operations
d. Dividends
53. Which one of the following types of losses is excluded from the determination of net
income in income statements?
a. Material losses resulting from transactions in the company’s investments account.
b. Material losses resulting from unusual sales of assets not acquired for resale.
c. Material losses resulting from the write–off of intangibles.
d. Material losses resulting from correction of errors related to prior periods.
54. Watts Corporation made a very large arithmetical error in the preparation of its year–end
financial statements by improper placement of a decimal point in the calculation of
depreciation. The error caused the net income to be reported at almost double the proper
amount. Correction of the error when discovered in the next year should be treated as
a. an increase in depreciation expense for the year in which the error is discovered.
b. a component of income for the year in which the error is discovered, but separately
listed on the income statement and fully explained in a note to the financial
statements.
c. a change in accounting principle for the year in which the error was made.
d. a prior period adjustment.
55. A company is not required to report a per share amount on the face of the income
statement for which one of the following items?
a. Net income
b. Prior period adjustment
c. Continuing operations
d. Discontinued operations
Income Statement and Related Information
4 – 15
56. Earnings per share data are required on the face of the
a. statement of retained earnings.
b. statement of stockholders’ equity.
c. income statement.
d. balance sheet.
57. Which of the following is included in comprehensive income?
a. Investments by owners.
b. Unrealized gains on available–for-sale debt securities.
c. Distributions to owners.
d. Changes in accounting principles.
58. Which of the following is not an acceptable way of displaying the components of other
comprehensive income?
a. Combined statement of retained earnings
b. One statement approach
c. Two statement approach
d. One and Two statement approach
59. Gains and losses identified as other comprehensive income have the same status as
traditional gains and losses under
a. both the one statement and two statement approaches.
b. neither the one statement or two statement approaches.
c. the one statement approach.
d. the two statement approach.
60. Comprehensive income includes all of the following except
a. dividend revenue.
b. losses on disposal of assets.
c. investments by owners.
d. unrealized holding gains.
61. A statement of stockholders’ equity includes a column for each of the following except
a. accumulated other comprehensive income.
b. common stock.
c. net income.
d. retained earnings.
Test Bank for Intermediate Accounting, Seventeenth Edition
4 – 16
Multiple Choice Answers—Conceptual
Income Statement and Related Information
4 – 17
MULTIPLE CHOICE—Computational
62. Ortiz Co. had the following account balances:
Sales revenue $ 440,000
Cost of goods sold 220,000
Salaries and wages expense 30,000
Depreciation expense 60,000
Dividend revenue 12,000
Utilities expense 24,000
Rent revenue 60,000
Interest expense 36,000
Sales returns and allow. 33,000
Advertising expense 39,000
What would Ortiz report as total revenues in a single-step income statement?
a. $479,000
b. $ 70,000
c. $472,000
d. $440,000
63. Ortiz Co. had the following account balances:
Sales revenue $ 440,000
Cost of goods sold 220,000
Salaries and wages expense 30,000
Depreciation expense 60,000
Dividend revenue 12,000
Utilities expense 24,000
Rent revenue 60,000
Interest expense 36,000
Sales returns and allow. 33,000
Advertising expense 39,000
What would Ortiz report as total expenses in a single-step income statement?
a. $421,000
b. $442,000
c. $409,000
d. $189,000
Test Bank for Intermediate Accounting, Seventeenth Edition
4 – 18
64. For Mortenson Company, the following information is available:
Cost of goods sold $390,000
Dividend revenue 15,000
Income tax expense 36,000
Operating expenses 138,000
Sales revenue 600,000
In Mortenson’s single-step income statement, gross profit
a. should not be reported.
b. should be reported at $51,000.
c. should be reported at $210,000.
d. should be reported at $225,000.
65. For Mortenson Company, the following information is available:
Cost of goods sold $390,000
Dividend revenue 15,000
Income tax expense 36,000
Operating expenses 138,000
Sales revenue 600,000
In Mortenson’s multiple-step income statement, gross profit
a. should not be reported
b. should be reported at $51,000.
c. should be reported at $210,000.
d. should be reported at $225,000.
66. The following information was extracted from the 2020 financial statements of Max
Company:
Income from continuing operations before income tax $705,000
Selling and administrative expenses 480,000
Income from continuing operations 495,000
Gross profit 1,350,000
The amount reported for other expenses and losses is
a. $210,000
b. $15,000.
c. $165,000.
d. $225,000.
Income Statement and Related Information
4 – 19
67. Gross billings for merchandise sold by Lang Company to its customers last year
amounted to $12,720,000; sales returns and allowances were $370,000, sales discounts
were $175,000, and freight-out was $140,000. Net sales last year for Lang Company were
a. $12,720,000.
b. $12,350,000.
c. $12,175,000.
d. $12,035,000.
68. If plant assets of a manufacturing company are sold at a gain of $1,800,000 with related
taxes of $540,000, and the gain is not considered unusual or infrequent, the income
statement for the period would disclose these effects as
a. a gain of $1,800,000 and an increase in income tax expense of $540,000.
b. operating income net of applicable taxes, $1,260,000.
c. a prior period adjustment net of applicable taxes, $1,260,000.
d. a discontinued operations gain net of applicable taxes, $1,260,000.
69. At Ruth Company, events and transactions during 2020 included the following. The tax
rate for all items is 20%.
(1) Depreciation for 2018 was found to be understated by $150,000.
(2) A strike by the employees of a supplier resulted in a loss of $125,000.
(3) The inventory at December 31, 2018 was overstated by $200,000.
The effect of these events and transactions on 2020 income from continuing operations
net of tax would be
a. ($100,000).
b. ($220,000).
c. ($380,000).
d. ($280,000).
70. At Ruth Company, events and transactions during 2020 included the following. The tax
rate for all items is 20%.
(1) Depreciation for 2018 was found to be understated by $120,000.
(2) A strike by the employees of a supplier resulted in a loss of $100,000.
(3) The inventory at December 31, 2018 was overstated by $160,000.
(4) A disposal of a component of the business resulted in a $2,000,000 loss.
The effect of these events and transactions on 2020 net income net of tax would be
a. ($47,000).
b. ($1,680,000).
c. ($1,776,000).
d. ($1,904,000).
Test Bank for Intermediate Accounting, Seventeenth Edition
4 – 20
71. During 2020, Lopez Corporation disposed of Pine Division, a major component of its
business. Lopez realized a gain of $3,000,000, net of taxes, on the sale of Pine’s assets.
Pine’s operating losses, net of taxes, were $3,500,000 in 2020. How should these facts be
reported in Lopez’s income statement for 2020?
Total Amount to be Included in
Income from Results of
Continuing Operations Discontinued Operations
a. $3,500,000 loss $3,000,000 gain
b. 500,000 loss 0
c. 0 500,000 loss
d. 3,000,000 gain 3,500,000 loss
72. Arreaga Corp. has a tax rate of 20 percent and income before non–operating items of
$1,392,000. It also has the following items (gross amounts).
Unusual loss $222,000
Discontinued operations loss 606,000
Gain on disposal of equipment 48,000
Change in accounting principle
increasing prior year’s income 318,000
What is the amount of income tax expense Arreaga would report on its income statement?
a. $278,400
b. $243,600
c. $297,600
d. $186,000
73. Palomo Corp has a tax rate of 20 percent and income before non-operating items of
$1,785,000. It also has the following items (gross amounts).
Unusual gain $ 115,000
Loss from discontinued operations 915,000
Dividend revenue 30,000
Income increasing prior
period adjustment 370,000
What is the amount of income tax expense Palomo would report on its income statement?
a. $386,000
b. $203,000
c. $277,000
d. $363,000