Intermediate Accounting, 9e (Spiceland)
Chapter 4 The Income Statement, Comprehensive Income, and the Statement of Cash
Flows
1) Income from continuing operations sometimes includes gains from nonoperating activities.
2) The single-step format of the income statement first lists all the revenues and gains included in
income from continuing operations.
3) The single-step format of the income statement does not separately report nonoperating gains
in the revenues section of the income statement.
4) The multiple-step format of the income statement reports a series of intermediate subtotals
such as gross profit, operating income, and income before taxes.
5) Intraperiod tax allocation is the process of associating income tax effects with the income
statement components that create those effects.
6) Material restructuring costs are reported as an element of income from continuing operations.
7) Restructuring costs most often refer to costs associated with management’s plans to materially
change the scope of business operations or the manner in which they are conducted.
8) Earnings quality refers to the ability of reported earnings (income) to predict future earnings.
9) Income from continuing operations consists only of those items expected to be permanent
components of earnings.
10) Interest expense typically is considered a temporary component of earnings.
11) Gains, but not losses, from discontinued operations must be separately reported in an income
statement.
12) Income statements prepared according to both U.S. GAAP and International Financial
Reporting Standards (IFRS) require the separate reporting of discontinued operations.
13) A change in accounting principle that is implemented using the retrospective approach
includes restating financial statements of all periods presented as if the new standard had been
used in those periods.
14) A change in accounting principle that is implemented using the modified retrospective
approach includes implementing the change in the current period only and not adjusting for the
cumulative effects on prior periods.
15) Changes in estimates are accounted for using the prospective approach.
16) Material errors in prior periods’ income statements are corrected by making an adjustment to
the beginning balance of the current period’s retained earnings.
17) Earnings per share disclosure is required only for income from continuing operations.
18) Comprehensive income reports an expanded version of income to include certain types of
gains and losses not included in traditional income statements.
19) Comprehensive income is the total change in shareholders’ equity that occurred during the
period.
20) The direct and indirect methods of reporting the statement of cash flows present different
information for investing and financing activities.
21) International Financial Reporting Standards (IFRS) require a company to classify expenses
in an income statement by function.
22) In a statement of cash flows prepared under International Financial Reporting Standards
(IFRS), interest received is most often classified as an operating cash flow.
23) In a statement of cash flows prepared under International Financial Reporting Standards
(IFRS), interest paid is most often classified as a financing cash flow.
24) A decrease in the receivables turnover ratio indicates a decrease in the time between credit
sales and cash collection.
25) The decomposition of return on assets illustrates why some companies with low profit
margins can be very profitable if their asset turnover is high.
26) A company could improve its return on assets by increasing its income or by increasing its
total assets.
27) Return on shareholders’ equity is increased if a firm can maintain its return on assets but
increase its leverage.
28) Intraperiod income tax presentation is primarily a matter of:
A) Valuation.
B) Going concern.
C) Periodicity.
D) Allocation.
29) The difference between single-step and multiple-step income statements is primarily an issue
of:
A) Consistency.
B) Presentation.
C) Measurement.
D) Valuation.
30) Most real-world income statements are presented using which format?
A) Income-step.
B) Single-step.
C) Magnitude-step.
D) Multiple-step.
31) A primary advantage of the multiple-step format of the income statement over the single-step
format is that the multiple-step format:
A) classifies expenses by function.
B) results in a higher amount of net income.
C) separately lists income tax expense.
D) lists revenues and expenses in order of their dollar amount.
32) Which of the following profit amounts usually will be listed in both the single-step and
multiple-step formats of the income statement?
A) Gross profit.
B) Operating income.
C) Income before taxes.
D) Net nonoperating income.
33) The relationship between revenue from selling inventory and the cost of that inventory is
measured as:
A) Net income.
B) Gross profit.
C) Income before taxes.
D) Operating income.
34) Popson Inc. incurred a material loss that was unusual in character. This loss should be
reported as:
A) a discontinued operation.
B) a line item between income from continuing operations and income from discontinued
operations.
C) a line item within income from continuing operations.
D) a line item in the retained earnings statement.
35) Provincial Inc. reported the following before-tax income statement items:
Operating income
$
600,000
Loss on discontinued operations
100,000
Provincial has a 30% income tax rate.
Provincial would report the following amount of income tax expense as a separately stated line
item in the income statement:
A) $198,000.
B) $180,000.
C) $168,000.
D) $150,000.
36) Freda’s Florist reported the following before-tax income statement items for the year ended
December 31, 2018:
Operating income
$
250,000
Income on discontinued operations
70,000
All income statement items are subject to a 40% income tax rate. In its 2018 income statement,
Freda’s separately stated income tax expense and total income tax expense would be:
A) $128,000 and $128,000, respectively.
B) $128,000 and $100,000, respectively.
C) $100,000 and $128,000, respectively.
D) $100,000 and $100,000, respectively.
Income tax expense stated separately
($250,000 × 40%)
$
100,000
Tax expense due to discontinued operations
($70,000 × 40%)
28,000
Total income tax expense
$
128,000
37) Earnings quality refers to:
A) the ability of management to budget for expenditures in the following year.
B) the ability of management to sell its inventory for a profit.
C) the ability of management to quickly collect cash from customers.
D) the ability of reported earnings to predict a company’s future earnings.
38) Income smoothing refers to:
A) the ability of management to report an earnings amount in each period less than actual
earnings.
B) the ability of management to use accruals to reduce the volatility of reported earnings over
time.
C) the ability of management to maintain sales to its current customers for several years.
D) the ability of management to report an earnings amount in each period greater than actual
earnings.
39) Managers may engage in classification shifting by:
A) reporting sales to fictitious customers to inflate reported revenues.
B) reduce estimates of accrued expenses to inflate reported net income.
C) reporting operating expenses as nonoperating expenses to inflate reported operating income.
D) increasing estimates of accrued expenses to inflate reported net income.
40) Financial statement users typically begin their assessment of permanent earnings with:
A) sales revenue.
B) income from continuing operations.
C) net income.
D) gross profit.
41) Temporary earnings are best characterized as:
A) earnings that do not have corresponding cash flows.
B) earnings from nonoperating activities.
C) earnings that do not conform to Generally Accepted Accounting Principles (GAAP).
D) earnings that arise from events that are not likely to recur in the foreseeable future.
42) Which of the following mostly likely would be classified as restructuring costs?
A) Advertising costs to sell a product recently developed by a company.
B) Severance pay for employee layoffs associated with facility closings.
C) Brokerage fees from the issuance of additional shares of stock.
D) Acquisition fees associated with the purchase of land and buildings.
43) Restructuring costs typically can be defined as:
A) costs of external financing through issuance of debt or equity securities.
B) costs associated safeguarding a company’s assets and ensuring accuracy of financial reporting.
C) costs associated with management’s plans to materially change the scope of business
operations or the manner in which they are conducted.
D) costs of expenditures made on capital projects and executive compensation.
44) Non-GAAP earnings:
A) could be considered management’s view of permanent earnings.
B) are needed for the correction of errors.
C) are standardized under generally accepted accounting principles.
D) are useful to compare two different firms’ performance.
45) A common component of income excluded from the calculation of non-GAAP earnings is:
A) Interest expense.
B) Income tax expense.
C) Cost of goods sold.
D) Restructuring costs.
46) The distinction between operating and nonoperating income relates to:
A) continuity of income.
B) primary activities of the reporting entity.
C) consistency of income stream.
D) reliability of measurements.
47) A company reports the following amounts at the end of the current year:
Sales revenue
$
860,000
Selling expenses
250,000
Gain on the sale of land
30,000
Interest expense
10,000
Cost of goods sold
520,000
Under normal circumstances (ignoring tax effects), permanent earnings would be computed as:
A) $90,000.
B) $110,000.
C) $80,000.
D) $50,000.
48) The principal benefit of separately reporting discontinued operations is to enhance:
A) predictive ability of future profitability.
B) consistency in reporting.
C) intraperiod continuity.
D) comprehensive reporting.
49) The Claxton Company manufactures children’s toys and also has a division that makes
automobile parts. Due to a change in its strategic focus, the company sold the automobile parts
division. The division qualifies as a component of the entity according to GAAP. How should
Claxton report the sale in its 2018 income statement?
A) Report it as restructuring costs.
B) Report it as a discontinued operation.
C) Report the income or loss from operations of the division in discontinued operations.
D) Report it as a gain on sale of investments included in income from continuing operations.
50) On August 1, 2018, Rocket Retailers adopted a plan to discontinue its catalog sales division,
which qualifies as a separate component of the business according to GAAP regarding
discontinued operations. The disposal of the division was expected to be concluded by June 30,
2019. On January 31, 2019, Rocket’s fiscal year-end, the following information relative to the
discontinued division was accumulated:
Operating loss Feb. 1, 2018–Jan. 31, 2019
$
115,000
Estimated operating losses, Feb. 1–June 30, 2019
80,000
Impairment of division assets at Jan. 31, 2019
10,000
In its income statement for the year ended January 31, 2019, Rocket would report a before-tax
loss on discontinued operations of:
A) $(115,000).
B) $(195,000).
C) $(65,000).
D) $(125,000).
51) On November 1, 2018, Jamison Inc. adopted a plan to discontinue its barge division, which
qualifies as a separate component of the business according to GAAP regarding discontinued
operations. The disposal of the division was expected to be concluded by April 30, 2019. On
December 31, 2018, the company’s year-end, the following information relative to the
discontinued division was accumulated:
Operating loss Jan. 1–Dec. 31, 2018
$
65
million
Estimated operating losses, Jan. 1 to April 30, 2019
80
million
Excess of fair value, less costs to sell, over book value at
Dec. 31, 2018
15
million
In its income statement for the year ended December 31, 2018, Jamison would report a before-
tax loss on discontinued operations of:
A) $65 million.
B) $50 million.
C) $130 million.
D) $145 million.
52) On October 28, 2018, Mercedes Company committed to a plan to sell a division that
qualified as a component of the entity according to GAAP regarding discontinued operations and
was properly classified as held for sale on December 31, 2018, the end of the company’s fiscal
year. The division’s loss from operations for 2018 was $2,000,000.
The division’s book value and fair value less cost to sell on December 31 were $3,000,000 and
$2,500,000, respectively. What before-tax amount(s) should Mercedes report as loss on
discontinued operations in its 2018 income statement?
A) $2,000,000 loss.
B) $2,500,000 loss.
C) No loss would be reported.
D) $500,000 impairment loss included in continuing operations and a $2,000,000 loss from
discontinued operations.
53) On October 28, 2018, Mercedes Company committed to a plan to sell a division that
qualified as a component of the entity according to GAAP regarding discontinued operations and
was properly classified as held for sale on December 31, 2018, the end of the company’s fiscal
year. The division’s loss from operations for 2018 was $2,000,000.
The division’s book value and fair value less cost to sell on December 31 were $3,000,000 and
$3,500,000, respectively. What before-tax amount(s) should Mercedes report as loss on
discontinued operations in its 2018 income statement?
A) $2,000,000 loss.
B) $2,500,000 loss.
C) No loss would be reported.
D) $500,000 gain included in continuing operations and a $2,000,000 loss from discontinued
operations.
54) On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for
$80 million. The sale was completed on December 31, 2018.
The following additional facts pertain to the transaction:
• The Footwear Division qualifies as a component of the entity according to GAAP
regarding discontinued operations.
• The book value of Footwear’s assets totaled $48 million on the date of the sale.
• Footwear’s operating income was a pre-tax loss of $10 million in 2018.
• Foxtrot’s income tax rate is 40%.
In the income statement for the year ended December 31, 2018, Foxtrot Co. would report:
A) Income (loss) on its total operations for the year without separation.
B) Income (loss) on its continuing operation only.
C) Income (loss) from its continuing and discontinued operations separately.
D) Income and gains separately from losses.
55) On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for
$80 million. The sale was completed on December 31, 2018.
The following additional facts pertain to the transaction:
• The Footwear Division qualifies as a component of the entity according to GAAP
regarding discontinued operations.
• The book value of Footwear’s assets totaled $48 million on the date of the sale.
• Footwear’s operating income was a pre-tax loss of $10 million in 2018.
• Foxtrot’s income tax rate is 40%.
In the income statement for the year ended December 31, 2018, Foxtrot Co. would report:
A) All income taxes combined into one line item.
B) Income taxes separated for continuing and discontinued operations.
C) Income taxes reported for income and gains only.
D) None of these answer choices are correct.
56) On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for
$80 million. The sale was completed on December 31, 2018.
The following additional facts pertain to the transaction:
• The Footwear Division qualifies as a component of the entity according to GAAP
regarding discontinued operations.
• The book value of Footwear’s assets totaled $48 million on the date of the sale.
• Footwear’s operating income was a pre-tax loss of $10 million in 2018.
• Foxtrot’s income tax rate is 40%.
In the income statement for the year ended December 31, 2018, Foxtrot Co. would report income
from discontinued operations of:
A) $9.2 million.
B) $13.2 million.
C) $22 million.
D) $26 million.