143
Chapter 4—Reporting Earnings and Financial Position
True/
False
L.O.’s
Level of
Difficulty
True/
False
L.O.’s
Level of
Difficulty
1
2
EASY
7
3
EASY
2
2
EASY
8
3
MOD
3
2
EASY
9
3
EASY
4
2
EASY
10
4
EASY
5
2
MOD
11
5
EASY
6
2
MOD
12
5
MOD
Multiple
Choice
L.O.’s
Level of
Difficulty
Multiple
Choice
Level of
Difficulty
Multiple
Choice
L.O.’s
Level of
Difficulty
1
1
EASY
21
EASY
41
3
MOD
2
1
EASY
22
EASY
42
3
MOD
3
3
EASY
23
EASY
43
3
EASY
4
2
EASY
24
EASY
44
3
MOD
5
2
EASY
25
MOD
45
4
EASY
6
2
EASY
26
EASY
46
4
MOD
7
2
EASY
27
MOD
47
4
MOD
8
2
EASY
28
EASY
48
4
EASY
9
2
EASY
29
MOD
49
4
MOD
10
2
EASY
30
MOD
50
4
MOD
11
2
MOD
31
MOD
51
3,4
MOD
12
2
EASY
32
MOD
52
4
MOD
13
2
EASY
33
MOD
53
4
MOD
14
2
MOD
34
MOD
54
5
DIFF
15
2
EASY
35
MOD
55
5
MOD
16
2
MOD
36
MOD
56
5
DIFF
17
2
MOD
37
EASY
57
5
MOD
18
2
MOD
38
EASY
58
5
MOD
19
3
MOD
39
MOD
59
5
MOD
20
3
EASY
40
DIFF
144 ♦ Chapter 4
Matching
L.O.’s
Level of
Difficulty
Matching
L.O.’s
Level of
Difficulty
Matching
L.O.’s
Level of
Difficulty
1
2
MOD
13
3
MOD
25
2
MOD
2
2
MOD
14
3
MOD
26
3
MOD
3
2
MOD
15
3
MOD
27
4
DIFF
4
2
MOD
16
2
EASY
28
2
MOD
5
2
MOD
17
3
MOD
29
3
DIFF
6
2
MOD
18
3
MOD
30
2
MOD
7
3
MOD
19
2
EASY
31
3
MOD
8
3
MOD
20
3
MOD
32
3
EASY
9
3
MOD
21
3
MOD
33
3,4
MOD
10
3
MOD
22
2
EASY
34
4
MOD
11
3
MOD
23
1,4
MOD
35
3
MOD
12
3
MOD
24
3
MOD
36
3
DIFF
Problem
L.O.’s
Level of
Difficulty
Problem
L.O.’s
Level of
Difficulty
Problem
L.O.’s
Level of
Difficulty
1
2
MOD
7
2
DIFF
13
2,3
DIFF
2
2
MOD
8
2
DIFF
14
2,3
DIFF
3
2
MOD
9
2
MOD
15
2,3
DIFF
4
2
MOD
10
2
DIFF
16
4
MOD
5
2,3,4
MOD
11
3
MOD
17
4
MOD
6
2,3,4
DIFF
12
2,3
DIFF
18
4
DIFF
Essay
L.O.’s
Level of
Difficulty
1
2
MOD
2
2
MOD
3
3
MOD
4
3
DIFF
5
3
MOD
6
5
DIFF
7
5
DIFF
Reported Earnings and Financial Position ♦ 145
TRUE/FALSE
1. Another name for the income statement is the statement of financial position.
2. The difference between the selling price of goods sold to customers during a period and the cost of
the goods sold is gross profit.
3. The excess of gross profit over operating expenses is income from operations.
4. Comparative financial statements report the combined economic activities of two or more
corporations owned by the same stockholders.
5. Period costs are costs directly associated with specific goods.
6. Earnings per share is computed by dividing income from operations by the average number of
common shares outstanding during a fiscal period.
7. Plant assets are cash or other resources expected to be converted to cash or consumed during the
next fiscal year.
8. Long-term legal rights resulting from the ownership of patents and similar items are known as
intangible assets.
9. Working capital is the difference between current assets and current liabilities.
146 ♦ Chapter 4
10. The two major divisions of stockholders’ equity are contributed capital and retained earnings.
11. Financial Statements have limitations that affect the usefulness of the information the statements
report.
12. Generally Accepted Accounting Principles (GAAP) prohibits the use of estimates in preparing
financial statements.
MULTIPLE CHOICE
1. Which of the following is a TRUE statement?
a.
Financial statements are the primary means organizations use to report general-purpose
accounting information to external decision makers.
b.
Financial statements are the primary means of supporting the information on tax returns.
c.
Financial statements are specific-purpose reports used primarily by internal decision
makers.
d.
Financial statements are prepared according to the internal revenue code of the IRS.
2. Which of the following is NOT one of the three primary financial statements organizations use to
report to external decision makers?
a.
statement of cash flows
b.
balance sheet
c.
gross profit statement
d.
income statement
3. The financial statement that reports an organization’s assets, liabilities, and owners’ equity
accounts is the
a.
income statement
b.
gross profit statement
c.
balance sheet
d.
statement of cash flows
Reported Earnings and Financial Position ♦ 147
4. The difference between the selling price of goods sold to customers during a period and the cost of
the goods sold is
a.
pretax income
b.
operating income
c.
net income
d.
gross profit
5. Consolidated financial statements
a.
report the combined economic activities of two or more corporations owned by the same
stockholders
b.
report a shortened version, to the SEC, of financial statements reported to the public
c.
report the combined financial statements of subsidiaries that are only partially owned
d.
are the same thing as classified financial statements
6. Costs directly associated with specific goods are
a.
period costs
b.
product costs
c.
past period costs
d.
prepaid costs
7. The primary difference between a product cost and a period cost is that
a.
product costs are associated with specific goods and period costs are not
b.
product costs are incurred by manufacturers and period costs by service providers
c.
only product costs are recorded as expenses
d.
period costs become part of cost of goods sold but product costs do not
8. The income statement reports
a.
the costs of resources consumed in producing, selling, and distributing goods and services
and the prices of goods and services sold during a period
b.
the cash consequences of financing, investing, and operating activities during a period
c.
the resources available for use in the transformation process and claims to those resources
at a point in time
d.
summaries of accounts by general categories
148 ♦ Chapter 4
9. Revenues indicate
a.
the sales price of goods and services sold during a period
b.
how much cash was received from the sales during a period
c.
the cost of resources consumed in producing and selling goods and services sold during a
period
d.
the net income earned during a period
10. A loss from operations would occur from which of the following circumstances?
a.
if gross profit is greater than operating income
b.
if operating income is greater than operating expense
c.
if operating expenses are greater than gross profit
d.
if gross profit is greater than income taxes
11. Which of the following is NOT reported on the income statement?
a.
income taxes
b.
non-operating items
c.
accumulated depreciation
d.
earnings per share
12. Where, on an income statement, would you expect to find the term Advertising Expense?
a.
just after gross margin
b.
grouped with the other operating expenses
c.
immediately after net sales revenue
d.
it would not be shown on a multiple-step income statement
13. Gross margin (or gross profit) is computed as
a.
net sales minus operating expenses
b.
operating income minus cost of goods sold
c.
cost of goods sold minus operating and administrative expenses
d.
net sales of goods or services minus cost of goods sold
14. Which of the following is a false statement?
a.
operating income is another term for gross profit
b.
operating expense on an income statement is listed after cost of goods sold
c.
some revenues and expenses on the income statement may not directly relate to a
company’s primary operations
d.
income taxes are generally reported after other revenues and expenses on an income
statement
Reported Earnings and Financial Position ♦ 149
15. Operating expenses should be reported on the income statement after
a.
sales revenue and before cost of goods sold
b.
administrative expenses but before cost of goods sold
c.
cost of goods sold and before earnings per share
d.
earnings per share but before administrative expenses
16. Operating income
a.
shows the amount of income produced by the primary earning activities of the company
b.
is computed by subtracting operating expenses from administrative expenses
c.
is just another term for net income
d.
includes the effects of operating expenses but not cost of goods sold
17. Which of the following statements about earnings per share is NOT TRUE?
a.
GAAP require that corporate income statements prepared for external use present earnings
per share
b.
earnings per share is a measure of the earnings performance of each share of common
stock during a period
c.
earnings per share is a measure of the amount of dividends per share distributed to
stockholders during a period
d.
earnings per share is computed by dividing net income by the number of common shares
outstanding during a period
18. Which of the financial statements below would reflect the financing and investing activities that
occurred during the year?
Balance Sheet Income Statement
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
19. The term “depletion” applies to
a.
equipment
b.
inventory
c.
buildings
d.
natural resources
150 ♦ Chapter 4
20. Cash or other resources expected to be converted to cash or consumed during the next fiscal year
would be classified as
a.
current assets
b.
plant assets
c.
liquid assets
d.
intangible assets
21. Which of the following best describes the purpose of the balance sheet?
a.
summarize revenues and expenses for the accounting period
b.
report the inflows and outflows of cash
c.
balance current period revenues with those of the previous period
d.
report assets, liabilities and owner’s equity as of a specific date
22. Which of the following financial statements reports information about events that occurred during
a certain period of time?
Balance Sheet Income Statement
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
23. Total assets, liabilities and owner’s equity are reported on which of the following statements?
Balance Sheet Income Statement
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
24. The balance sheet differs from the other financial statements in that
a.
it is the most important statement to the investor
b.
it is prepared more frequently
c.
it is dated as of a specific point in time
d.
its purpose is to show where cash came from during the period, and how the cash was used
Reported Earnings and Financial Position ♦ 151
25. Which of the following financial statements reports the resources available for use in the
transformation process as well as any claims to those resources at a point in time?
a.
the income statement
b.
the cash-flow statement
c.
the balance sheet
d.
the annual report
26. Assume you are examining a financial statement that indicates it is “At December 31, 2007.” That
heading tells you the statement is the
a.
income statement
b.
balance sheet
c.
statement of cash flows
d.
statement of stockholders’ equity
27. Which financial statement(s) report(s) the financial position of the firm at a specific point in time?
a.
the balance sheet, income statement, and statement of cash flows
b.
the balance sheet and income statement
c.
the income statement only
d.
the balance sheet only
28. The income statement reports which of the following?
a.
assets and liabilities
b.
cash inflows and cash outflows
c.
revenues and expenses
d.
retained earnings and dividends
29. Comprehensive income is
a.
another term for operating income
b.
the change in equity resulting from non-owner transactions and events
c.
the income earned by a company
d.
dividend income
152 ♦ Chapter 4
30. A statement of stockholders’ equity differs from a balance sheet in that
a.
stockholders’ equity is not reported on the balance sheet
b.
the statement of stockholders’ equity reports activity for a period of time while the balance
sheet reports at a specific point in time
c.
contributed capital is reported on the statement of stockholders’ equity but not on the
balance sheet
d.
retained earnings are added to the balance sheet but deducted from the statement of
stockholders’ equity
31. A similarity between the balance sheet and the statement of stockholders’ equity is that both
a.
are less important than the income statement
b.
are prepared before the income statement is prepared
c.
report activity over a period of time
d.
report retained earnings
32. The term “working capital” describes the
a.
amount of equity (ownership) capital in the firm
b.
portion of capital actively employed in generating revenues
c.
amount of debt (borrowed) capital in the firm
d.
excess of current resources over current obligations
33. The Stable Company reports the following information:
Accounts payable
$ 600
Accounts receivable
$ 8,200
Cash
5,000
Mortgage payable
4,400
Retained earnings
7,800
Inventory
9,200
Buildings
17,600
Office supplies
2,600
What is the amount of the firm’s current assets?
a.
$13,200
b.
$25,000
c.
$22,400
d.
$42,600
Reported Earnings and Financial Position ♦ 153
34. Which of the following sub-classifications should be reported LAST in the asset section of the
balance sheet?
a.
other assets
b.
current assets
c.
property, plant, and equipment
d.
long-term investments
35. Which of the following is NOT true about financial statements?
a.
the balance sheet reports the financial position of a business at a particular point in time
b.
the income statement reports the net cash received during the period as a result of
operating activities
c.
the statement of cash flows reports the inflows and outflows of cash for the period
d.
the statement of stockholders’ equity includes information about net income and dividends
for the period
36. When evaluating the balance sheet, liquidity refers to the
a.
amount of equity a company has compared to liabilities
b.
ability of a firm to meet short-term obligations
c.
long-run financial health of the enterprise
d.
dividend paying capability of the company
37. Accounts receivable should be classified on the balance sheet as
a.
a current asset
b.
stockholders’ equity
c.
property, plant, and equipment
d.
an intangible asset
e.
a long-term liability
38. Which of the following accounts should be classified on the balance sheet as an intangible asset?
a.
prepaid insurance
b.
cash
c.
investment in another company
d.
stockholders’ equity
e.
trademark
154 ♦ Chapter 4
39. Which of the following is used to evaluate liquidity?
a.
operating expenses
b.
current assets
c.
plant, property and equipment
d.
other assets
40. Current assets
a.
include cash, accounts receivable, and inventory
b.
include cash and other assets that will be used up within one year
c.
sometimes include assets that will be converted to cash or consumed over a period that
exceeds one year
d.
include all of the above answers
41. Which of the following must be known in order to determine the organization’s total amount of
working capital?
Current Assets Long-Term
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
42. The concept of the “operating cycle” is most critical to reporting which of the following?
a.
earnings per share
b.
stockholders’ equity
c.
cash flows
d.
current assets
43. The operating cycle of most businesses is
a.
greater than one year
b.
the time necessary to acquire a machine, use it, sell it, and collect the resulting cash
c.
the time required to manufacture and sell a product
d.
less than 12 months
Reported Earnings and Financial Position ♦ 155
44. A classified balance sheet is one that
a.
is not distributed publicly because of national security reasons
b.
reports revenue and expenses by the category in which they were earned
c.
groups assets and liabilities into specific categories
d.
has a statement of retained earnings included
45. The two major components of stockholders’ equity are
a.
contributed capital and retained earnings
b.
sales and cost of goods sold
c.
revenues and expenses
d.
assets and liabilities
46. The relationship between financial statements in which account balances on one statement help
explain those on another statement is known as
a.
accrual basis accounting
b.
balancing
c.
value creation
d.
articulation
47. Under the concept of articulation, which of the following is the link between the cash inflow from
customers and sales revenue?
a.
accounts receivable
b.
cost of goods sold
c.
inventory
d.
accounts payable
48. Which term is used in accounting to describe the interrelationship of one financial statement to
one or more of the firm’s other financial statements?
a.
consolidation
b.
amortization
c.
recapitulation
d.
articulation
156 ♦ Chapter 4
49. Mags & Wheels, Inc. reported Retained Earnings of $20,000 at year-end 2007. The accompanying
income statement reported $20,000 in revenues for 2007 and $10,000 in expenses. The beginning
2007 balance of Retained Earnings must have been
a.
$50,000
b.
$40,000
c.
$30,000
d.
$20,000
e.
$10,000
50. Changes that result from profits earned, dividends paid, and stock issued are reported on
a.
the balance sheet
b.
the income statement
c.
the cash flow statement
d.
the statement of stockholders’ equity
51. The ending balances on the statement of stockholders’ equity are also reported on the ________ .
a.
sales chart
b.
cash flow statement
c.
balance sheet
d.
income statement
52. Which of the following will affect a company’s contributed capital?
a.
the purchase of another company’s stock
b.
the payment of dividends
c.
the earning of net income
d.
the issuance of stock
53. Great Confections Inc. had a balance of $200,000 in stockholders’ equity at December 31, 2006.
During 2007, the company had a net income of $50,000, distributed dividends of $30,000, and
sold $10,000 of additional stock. What was the company’s stockholders’ equity at December 31,
2007?
a.
$250,000
b.
$220,000
c.
$260,000
d.
$230,000
Reported Earnings and Financial Position ♦ 157
54. For which of the following accounts would the use of historical costs be a greater limitation than
for the other three?
a.
cash
b.
accounts receivable
c.
buildings
d.
inventory
55. Which of the following accounts might require the use of estimates and allocations in order to
determine an amount of an expense to be recorded?
a.
accounts receivable
b.
depreciation
c.
cash
d.
sales
56. The way a company accounts for human resources is an example of which of the following
financial statement limitations?
a.
use of estimates and allocations
b.
use of historical costs
c.
omission of transactions
d.
omission of resources and costs
57. Which of the following statements regarding the limitations of financial statements is FALSE?
a.
many of the numbers of reported in financial statements result from estimates
b.
financial statements report primarily the current value of assets
c.
some important transactions may not be fully reported in a firm’s financial statements
d.
certain types of resources are not reported in the financial statements
58. All of the following could be considered limitations of financial statements EXCEPT:
a.
use of estimates and allocations
b.
reporting of historical costs
c.
assets = liabilities + owners equity
d.
delays in providing information to information users
158 ♦ Chapter 4
59. Which of the following could be considered limitations in the usefulness of financial statements
prepared under generally accepted accounting principles?
Omission of certain Use of estimates
resources and costs and allocations
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
MATCHING
Using the following letters, classify each of the items below according to the section of the income
statement in which they would be reported.
a.
Cost of goods sold
b.
Earnings per share
c.
Operating income
d.
Other revenues and expenses
e.
Not reported on the income statement
f.
Operating expenses
1. The excess of gross profit over operating expenses
2. The purchase price of merchandise sold during a period
3. Dividends
4. Interest expense
5. Net income divided by average common shares
6. Advertising expense
Reported Earnings and Financial Position ♦ 159
Using the following letters, classify each of the items below according to the section of the balance
sheet in which they would be reported (classifications can be used more than once).
a.
Current assets
b.
Long-term investments
c.
Property, plant, and equipment
d.
Intangible assets
e.
Current liabilities
f.
Long-term liabilities
g.
Contributed capital
h.
Retained earnings
7. Inventory
8. Accounts payable
9. Land
10. Copyrights
11. Notes payable, due in 3 years
12. Prepaid rent
13. Cash
14. Amount of direct investment by owners in a corporation
160 ♦ Chapter 4
Classify each of the items below according to the section of a firm’s financial statements in which
they would be reported. Use the following coding system. A letter may be used more than once.
a.
Current asset
b.
Property, plant & equipment
c.
Intangible assets
d.
Current liability
e.
Long-term liability
f.
Stockholders’ equity
g.
Revenue
h.
Operating expense
i.
Other expense
j.
None of the above
15. Accumulated depreciation
16. Cost of goods sold
17. Machinery used in the factory
18. Income taxes payable
19. Sales
20. Accounts receivable
21. Retained earnings
22. Interest expense
23. Dividends paid
24. Bonds payable (due in three years)
25. Earnings per share
26. Copyright