Chapter 13 – The Corporate Income Statement and the Statement of Stockholders’
Equity
TRUE/FALSE
1. The quality of earnings is an indication of the sustainability of earnings into future accounting periods.
2. Both restructurings and write-downs reduce current operating income.
3. Extraordinary gains and losses are a component of income from operations.
4. A gain on the sale of an asset is a component of income from operations.
5. In general, an accounting method or estimate that results in a higher current earnings produces a better
quality of operating income.
6. A write-down is another term for a restructuring.
7. Write-downs and restructurings are often an indication of bad management decisions in the past.
8. “Big baths” commonly occur when a company is having a good year.
9. A company with a high quality of earnings is one that has earned a substantial profit for the period.
10. Discontinued operations are considered non-operating items.
11. Non-operating items will generally reduce a company‘s quality of earnings.
12. The quality of a company’s earnings is affected by the accounting estimates chosen by the company‘s
management.
13. The write-off of goodwill that has been impaired is a component of income from operations.
14. An analysis of the nature of non-operating items is important in judging the quality of the net income
figure.
15. Corporate income statements must be prepared in multistep form.
16. The recognition point for revenues, expenses, gains and losses is the same for tax and financial
reporting purposes.
17. The amount of income taxes expense appearing on a corporation’s income statement must be
calculated in accordance with the matching principle.
18. Income tax allocation procedures are applied to comply with the matching principle.
19. The only possible change in the Deferred Income Taxes account balance for a period is due to the
difference between the amount of income taxes expense for that period and the amount of income
taxes actually payable to the IRS for the period.
20. If the amount of income taxes expense exceeds the amount of actual income taxes payable for a year,
the difference is recorded by a debit to a balance sheet account called Deferred Income Taxes.
21. A corporation is subject to a federal flat income tax rate of 34 percent.
22. Income tax allocation is necessary because tax rates differ at different levels of income.
23. The federal income tax is progressive in nature.
24. Extraordinary gains and losses must be shown in the financial statements “net of tax.”
25. On the income statement, all income taxes should be centralized in the Income Taxes Expense
account.
26. Deferred Income Taxes is classified as an asset when it has a debit balance.
27. The discrepancy between methods used for accounting purposes and methods used for tax purposes
causes items in the financial statements to be shown “net of tax.”
28. The income statement’s bottom–line figure (net income or loss) must be shown “net of tax.”
29. One objective of the corporate income statement is to separate the results of continuing operations
from those of discontinued operations.
30. A large uninsured loss from a fire is treated on the income statement as an extraordinary item.
31. Gains and losses from the takeover of property by a foreign government are treated as discontinued
operations.
32. Discontinued operations and extraordinary items should be reported in the financial statements “net of
tax.”
33. The results of discontinued operations are excluded from operating income on the income statement.
34. For an item to be treated as extraordinary, it must be unusual in nature and occur infrequently.
35. The results of discontinued operations appear below extraordinary gains and losses in the income
statement.
36. An extraordinary loss of $250,000 that results in income tax savings of $60,000 should be reported as
an extraordinary loss (net of tax) of $190,000 on the income statement.
37. Gains and losses caused by the passage of a new law should be classified as extraordinary on the
income statement.
38. Gains and losses from the sale of plant assets should be classified as extraordinary on the income
statement.
39. A company with a simple capital structure is required to report both basic and diluted earnings per
share.
40. Earnings per share information need not be shown for extraordinary gains and losses.
41. Diluted earnings per share should be a more conservative (lower) figure than basic earnings per share.
42. A business with 100,000 shares of stock outstanding for three months would use a weighted-average
25,000 shares in its earnings per share calculation.
43. A company with no potentially dilutive securities is considered to have a complex capital structure.
44. A business with a simple capital structure would present only basic earnings per share information in
its financial statements.
45. A company with convertible bonds is considered to have a complex capital structure.
46. A company with stock options is considered to have a simple capital structure.
47. A convertible preferred stock will be included in the denominator of diluted earnings per common
share.
48. A convertible bond is a potentially dilutive security.
49. Net income is a component of comprehensive income.
50. Investments by owners are contained in comprehensive income.
51. Retained earnings represent cash readily available for dividends.
52. A debit balance in the Retained Earnings account is referred to as a deficit.
53. A synonymous phrase for retained earnings is accumulated earnings.
54. A statement of retained earnings is not as informative as a statement of stockholders’ equity.
55. A statement of stockholders’ equity cannot take the place of a statement of retained earnings.
56. The date on a statement of stockholders’ equity is for a period of time rather than for a specific point in
time.
57. Comprehensive income includes net income, changes in unrealized investment gains and losses, and
other items affecting equity, such as foreign currency translation adjustments.
58. A liability arises when the board of directors declares a stock dividend.
59. A person owning stock on the date of record will receive stock dividends that have been declared.
60. A stock dividend is a pro rata distribution of cash to a corporation’s stockholders.
61. A small stock dividend normally results in a transfer from Retained Earnings to Contributed Capital of
an amount equal to the par value of the stock.
62. A stock dividend does not affect the total amount of stockholders’ equity.
63. The account Common Stock Distributable is classified as a current liability.
64. A stock dividend exceeding 20 to 25 percent is properly treated as a stock split.
65. A stock split normally increases total stockholders’ equity.
66. A stock split results in a transfer of the market value of the stock from Retained Earnings to
Contributed Capital.
67. A stock dividend will cause an increase in total contributed capital at the date the dividend is declared.
68. A stock dividend will cause an increase in the total number of shares issued and outstanding.
69. A 2-for-1 stock split will have the same effect on the number of shares outstanding as a 200 percent
stock dividend.
70. When common stock is originally issued, its market value per share should approximate its par or
stated value per share.
71. Book value per share of stock represents the amount the shareholder will receive per share if the
company is sold or liquidated.
72. In computing book value per share of common stock, common stock distributable is included in the
divisor.
73. The declaration of cash dividends will decrease the book value per share of common stock.
74. Par value or stated value is arbitrarily set when stock is authorized.
75. The book value of one share of callable preferred stock is equal to the call value of the preferred share
minus any dividends in arrears.
MULTIPLE CHOICE
1. Which of the following is not a component of income from operations?
a.
Costs and expenses
b.
Write-downs of assets
c.
Extraordinary losses
d.
Restructurings
2. The write-down of an asset will affect
a.
neither total assets nor net income.
b.
net income, but not total assets.
c.
both total assets and net income.
d.
total assets, but not net income.
3. The quality of a company’s earnings may be affected by the
a.
industry in which the company operates.
b.
choice of independent auditors.
c.
accounting methods the company uses.
d.
countries in which the company operates.
4. When alternative acceptable accounting methods exist, a better quality of earnings generally is
produced from selecting an accounting method that has the effect of reporting the
a.
lowest amount of future earnings.
b.
greatest amount of retained earnings currently.
c.
lowest amount of current earnings.
d.
greatest amount of assets currently.
5. The consistency convention requires that
a.
a company use the same independent auditors year after year.
b.
all companies operating in the same industry use the same accounting methods.
c.
the selection of a company’s accounting policies be disclosed in its financial statements.
d.
a company use the same accounting procedures year after year.
6. In a period of inflation, which of the following combinations of accounting methods will yield the
lowest amount of current earnings?
a.
LIFO and double-declining-balance method
b.
FIFO and straight-line method
c.
LIFO and straight-line method
d.
FIFO and double-declining-balance method
7. Which of the following is analyzed when a financial statement reader is looking at the nature of
non-operating items?
a.
Discontinued operations
b.
Interest expense
c.
Interest revenue
d.
Cost of goods sold
8. The existence of which of the following income statement items will reduce the quality of the
bottom-line figure?
a.
Advertising expense
b.
Revenues from services
c.
Cost of goods sold
d.
Extraordinary gain
9. The quality of earnings will be affected by which of the following?
a.
Estimation of building’s useful life
b.
Choice of inventory method
c.
Discontinued operations
d.
All of these
10. Net income does not include
a.
income taxes expense.
b.
discontinued operations.
c.
foreign currency translation adjustments.
d.
extraordinary gains and losses.
11. A corporate income statement does not contain
a.
discontinued operations.
b.
extraordinary gains and losses.
c.
unrealized investment gains and losses.
d.
earnings per share data.
12. Which of the following income statement figures probably would be the best predictor of a
corporation’s future performance?
a.
Total revenues
b.
Income from continuing operations
c.
Net income
d.
Income before extraordinary items
13. On a corporate income statement, income from continuing operations
a.
will exceed net income.
b.
will equal net income.
c.
will be less than net income.
d.
can equal, exceed, or be less than net income.
14. Income tax allocation procedures are justified by which of the following basic concepts?
a.
Cash basis accounting
b.
Revenue recognition
c.
Conservatism
d.
Matching
15. Income taxes expense represents the amount of income taxes
a.
computed in accordance with the income tax code.
b.
applicable to the amount of taxable income for the period.
c.
applicable to the amount of income from continuing operations for the period.
d.
actually payable to the IRS for the period.
16. An excess of income taxes expense over income taxes payable for a period is associated with a(n)
a.
excess of taxable income over accounting income.
b.
error.
c.
debit to the Deferred Income Taxes account.
d.
excess of accounting income over taxable income.
17. An excess of income taxes expense over income taxes payable will result in recording a
a.
debit to Deferred Income Taxes.
b.
debit to Income Taxes Payable.
c.
credit to Deferred Income Taxes.
d.
credit to Prior Period Adjustment.
18. Shank Corporation uses a different depreciation method for its income tax return than it does for its
income statement. Consequently, the corporation has a credit balance in its Deferred Income Taxes
account. This balance should be classified as a
a.
current asset.
b.
long-term liability.
c.
current liability.
d.
long-term asset.
19. Which of the following should be reported net of the related income tax effect on the income
statement?
a.
Loss due to a discontinued segment of a business
b.
Sale of a temporary investment at a loss
c.
Loss due to shoplifting
d.
Sale of an inventory item at a loss
20. When there is a difference in the timing of revenues and expenses for accounting versus income tax
purposes, it usually is necessary to
a.
adjust accounting income.
b.
perform income tax allocation procedures.
c.
adjust taxable income.
d.
do nothing because such differences are a result of two different sets of rules.
21. A debit balance in Deferred Income Taxes is classified as
a.
a liability.
b.
revenue.
c.
an asset.
d.
an expense.
22. Assume that a corporation in the 25 percent tax bracket purchases a piece of equipment for $67,000
with a ten-year useful life and no estimated salvage value. The corporation uses straight-line
depreciation for book purposes and double-declining-balance depreciation for tax purposes. The
first-year temporary difference, using income tax allocation procedures, would result in a
a.
debit to Deferred Income Taxes of $1,675.
b.
credit to Deferred Income Taxes of $6,700.
c.
credit to Deferred Income Taxes of $1,675.
d.
debit to Deferred Income Taxes of $6,700.
23. Which of the following items appears on the corporate income statement before Income from
Continuing Operations?
a.
Extraordinary gain
b.
Loss from sale of a discontinued segment
c.
Income taxes expense
d.
Income from operations of a discontinued segment
24. Which of the following items should be classified as an extraordinary item on a corporate income
statement?
a.
Excess of the selling price over the cost of treasury stock
b.
Loss due to takeover of property by a foreign government
c.
Gain on the sale of a long-term investment
d.
Loss due to discontinued operations
25. A loss due to discontinued operations should be reported on the income statement
a.
before extraordinary items.
b.
before income taxes expense.
c.
after net income.
d.
after extraordinary items.
26. Which of the following items would appear in the income statement below the others listed?
a.
Extraordinary gains and losses
b.
Restructurings
c.
Discontinued operations
d.
Income taxes expense
27. Which of the following would have the least likelihood of being treated as an extraordinary item?
a.
Uninsured loss from earthquake
b.
Gain or loss on sale of equipment
c.
Gain or loss arising from enactment of new law
d.
Uninsured loss from fire
28. For an item to be reported as extraordinary,
a.
the dollar amount must exceed $100.
b.
it must never have occurred before.
c.
it must relate to a typical activity of the business.
d.
recurrence in the foreseeable future must be unlikely.
29. Which of the following would be used when computing earnings per share for a company with a
complex capital structure?
a.
A nonconvertible bond
b.
A stock option
c.
A nonconvertible preferred stock
d.
Retained earnings
30. Which of the following would be involved in the computation of earnings per share for a company
with a simple capital structure?
a.
Stock options
b.
Number of shares of nonconvertible preferred stock
c.
Dividends declared on nonconvertible preferred stock
d.
Dividends declared on common stock
31. What effect will the purchase of treasury stock have on total stockholders’ equity and earnings per
share, respectively?
a.
Increase and decrease
b.
Decrease and increase
c.
Decrease and no effect
d.
Decrease and decrease
32. A company would be considered to have a complex capital structure if it had
a.
long-term notes payable.
b.
preferred stock.
c.
convertible bonds.
d.
restricted retained earnings.
33. A convertible security is used in the computation of
a.
diluted earnings per share.
b.
simple earnings per share.
c.
undiluted earnings per share.
d.
primary earnings per share.
34. Bowen Corporation had 39,000 shares of common stock outstanding from January 1 to April 1 and
59,000 shares from April 1 to December 31. What is the weighted-average number of shares used for
earnings per share calculations?
a.
44,000
b.
49,000
c.
54,000
d.
55,333
35. A company had 48,000 shares outstanding from January 1 to June 1 and 72,000 shares outstanding
from June 1 to December 31. What is the weighted-average number of shares used in earnings per
share calculations?
a.
58,000
b.
60,000
c.
62,000
d.
64,000
36. A company had the following amounts of common stock outstanding: 9,000 shares from January
through April, 15,000 shares from May through October, and 25,000 shares from November through
December. What is the weighted-average number of shares rounded to nearest dollar used in earnings
per share calculations?
a.
25,000
b.
13,917
c.
49,000
d.
14,667
37. On December 31, 2009, Kallman Corporation had 160,000 shares of common stock issued and
outstanding. On April 1, 2010, an additional 40,000 shares of common stock were issued for cash.
During 2010, Kallman declared and paid dividends of $150,000 on its 20,000 shares of nonconvertible
preferred stock. Net income for 2010 amounted to $400,000. Kallman’s earnings per share of common
stock (rounded to the nearest cent) for 2010 are
a.
$1.25.
b.
$1.32.
c.
$2.00.
d.
$2.11.
38. On December 31, 2009, Voss Corporation had 150,000 shares of common stock issued and
outstanding. On October 1, 2010, an additional 20,000 shares of common stock were issued for cash.
During 2010, Voss declared and paid dividends of $100,000 on its 10,000 shares of nonconvertible
preferred stock. During 2010, Voss declared and paid dividends of $80,000 on its common stock. Net
income for 2010 amounted to $500,000. The earnings per share of common stock (rounded to the
nearest cent) for 2010 are
a.
$1.88.
b.
$2.06.
c.
$2.58.
d.
$3.23.
39. Comprehensive income could contain all of the following except
a.
revenues.
b.
investments by stockholders.
c.
expenses.
d.
unrealized investment gains and losses.
40. Colfax Corporation had a Retained Earnings balance on January 1, 2009, of $720,000; declared cash
dividends during 2009 in the amount of $112,000, of which $30,000 were not paid until 2010; and
reported an ending balance of Retained Earnings of $1,020,000. Based on these facts alone, net income
for 2009 for Colfax Corporation must have been
a.
$152,000.
b.
$312,000.
c.
$382,000.
d.
$412,000.
41. The following facts pertain to Montecello Corporation for 2010:
Retained Earnings balance, January 1, 2010
$400,000
Cash dividends declared and paid in 2010
46,000
Retained Earnings balance (after closing), December 31, 2010
520,000
Net income for 2010
?
Based on the above facts, net income for 2010 for Montecello Corporation amounted to
a.
$146,000.
b.
$126,000.
c.
$166,000.
d.
$186,000.
42. All of the following are synonymous with retained earnings except
a.
retained income.
b.
earnings retained for use in the business.
c.
cash fund for future expansion.
d.
accumulated earnings.
43. The term deficit refers to
a.
an excess of expenses over revenues for one given operating period.
b.
a Retained Earnings account with a debit balance.
c.
an excess of actual expenses over amounts budgeted for those expenses.
d.
income of a prior period that was overstated when it was first reported.
44. The balance of the Retained Earnings account represents
a.
profits of a company since the date of its beginning less any losses, dividends to
stockholders, or transfers to contributed capital.
b.
an excess of revenues over expenses for the most current operating period.
c.
cash set aside for specific future uses.
d.
cash available for daily operations.
45. Which of the following items will not be disclosed on a statement of stockholders’ equity?
a.
Net income
b.
Issuance of common stock for cash
c.
Extraordinary gains and losses
d.
Issuance of common stock in exchange for noncash assets
46. The purpose of a statement of stockholders’ equity is to
a.
disclose the computation of book value per share of stock.
b.
budget the transactions expected to occur during the forthcoming period.
c.
replace the statement of retained earnings.
d.
summarize the changes in the components of stockholders’ equity for a period of time.
47. The preparation of a statement of stockholders’ equity makes which other financial statement
unnecessary?
a.
Income statement
b.
Statement of cash flows
c.
Statement of retained earnings
d.
Balance sheet
48. Which of the following would not affect the balance of the Retained Earnings account?
a.
Stock split
b.
Net loss
c.
Cash dividend declared
d.
Stock dividend declared
49. All of the following would appear on the statement of stockholders’ equity except
a.
declaration of cash dividends.
b.
an issuance of common stock.
c.
net income.
d.
declaration of a stock split.
50. Which of the following items will not be disclosed on a statement of stockholders’ equity?
a.
Conversion of preferred stock into common stock
b.
Results of discontinued operations
c.
Purchase of treasury stock
d.
Declaration of a stock dividend
51. On June 1, 20xx, Sterling Corporation had 40,000 shares of $10 par value common stock outstanding.
On June 2, 20xx, Sterling declared a 40 percent stock dividend to be distributed on July 5, 20xx, to
shareholders of record on June 15, 20xx. What amount of retained earnings should be transferred to
contributed capital because of this dividend?
a.
None
b.
Par value per share multiplied by the number of dividend shares
c.
Market value of the stock at the date of distribution multiplied by the number of dividend
shares
d.
Market value of the stock at the date of declaration multiplied by the number of dividend
shares
52. On July 1, 20xx, Tobias Corporation had 20,000 shares of its $100 par value common stock
outstanding. On July 2, 20xx, Tobias declared a 15 percent stock dividend to be distributed on August
6, 20xx, to shareholders of record on July 16, 20xx. What amount of retained earnings should be
transferred to contributed capital because of this dividend?
a.
None
b.
Market value of the stock at the date of distribution multiplied by the number of dividend
shares
c.
Market value of the stock at the date of declaration multiplied by the number of dividend
shares
d.
Par value per share multiplied by the number of dividend shares
53. A corporation should account for the declaration of a 10 percent stock dividend by
a.
transferring from retained earnings to contributed capital an amount equal to the legal
capital represented by the dividend shares.
b.
transferring from retained earnings to contributed capital an amount equal to the market
value of the dividend shares.
c.
transferring from retained earnings to contributed capital whatever amount the board of
directors deems appropriate.
d.
making only a memorandum entry in the general journal.
54. Which of the following statements is not true about a 2-for-1 stock split?
a.
Total contributed capital increases.
b.
Par value per share is reduced to half of what it was before the split.
c.
A stockholder with ten shares before the split owns twenty shares after the split.
d.
The market price probably will decrease.
55. Which of the following is not true about a 35 percent stock dividend?
a.
The market value of the stock is needed to record the stock dividend.