Chapter 5: Income Statement: Reporting Results of Operating
Activities Key
1. Revenues measure the inflow of net assets from operating activities.
2. Expenses provide future benefits, and assets measure the consumption of those benefits.
3. Expenditures on advertising and research must be recognized as expense in the period of expenditure,
regardless of the firm’s expectation of future benefits.
4. Expenses measure the outflow of net assets consumed in the process of generating revenues.
5. Cost is the economic sacrifice made to acquire goods or services.
6. Current accounting practice takes the viewpoint of shareholders by reporting the amount of net income
available to shareholders after subtracting from revenues all expenses incurred in generating the revenue by
claimants (for example, employees, lenders, governments) other than shareholders.
7. Gains/Losses arise from relatively infrequent transactions, and there can be no assurance that they will recur
in any future period.
8. Common terminology, but not definitions in U.S. GAAP and IFRS, often refers to the difference between
sales and cost of sales as gross margin, gross profit, or gross income.
9. The statement of cash flows begin with revenues; for this reason, analysts often refer to revenue growth as
“top-line” growth.
10. Most firms display the components of cost of sales.
11. Both U.S. GAAP and IFRS require the disclosure, in the notes to the financial statements, of selected
information about business segments.
12. The income statement typically provides information about the operating results of business segments.
13. Items classified as operating expenses reflect management’s judgment that the item is a cost of the core
business.
14. All transactions that increase net assets affect income.
15. Historically, recognition has described a preference for financial reporting such “that possible errors in
measurement be in the direction of understatement rather than overstatement of net income and net assets.”
16. Under the accrual method, the timing of revenue recognition is influenced by when the services or product
are provided.
17. Both U.S. GAAP and IFRS require firms to report certain information about each of their operating
segments.
18. The income statement, also called the statement of financial position, provides information, at
a point in time, on the firm’s productive resources and the financing used to pay for those
resources.
19. Comprehensive income equals net income as reported on the income statement plus (minus) the increase
(decrease) in other comprehensive income for the year.
20. U.S. GAAP and IFRS require firms to disclose unrealized gains and losses that historically have bypassed
the income statement in a category called other comprehensive income.
21. U.S. GAAP and IFRS require firms in some instances to change the carrying value of certain
assets and liabilities. Both sets of accounting standards preclude the recognition of these
changes in net income, and therefore in retained earnings.
22. There are three formats available for both U.S. GAAP and IFRS reporting of the items that are included in
Other Comprehensive Income.
23. U.S. GAAP and IFRS distinguish between revenues and expenses on the one hand and gains and losses on
the other. Which of the following is/are not true?
24. The firm recognizes an expense when the following condition(s) hold(s).
25. A seller of goods can easily associate (or match) the consumption of the benefits of the asset sold with
revenues from its sale. At the time of sale and revenue recognition, the seller
26. The matching convention assigns _____ to the related _____.
27. Which of the following concepts best characterizes the accrual basis of accounting?
28. Which of the following is/are true?
29. The _____ convention, links the timing of some expenses with revenue recognition.
30. _____ reflect the decrease in shareholders’ equity resulting from the decrease in the net assets consumed
during the generation of income.
31. Revenue and expense accounts
32. Which of the following is/are true?
33. When assets and income from operations that a firm has decided to discontinue (and dispose of or abandon),
separating the two income components allows users to form better predictions of
34. Income statements contain which of the following sections or categories, depending on the nature of a
firm’s earnings for the period?
35. Income statements prepared under IFRS contain which of the following sections or categories, depending on
the nature of a firm’s earnings for the period?
36. Income statements prepared under U.S. GAAP contain which of the following sections or categories,
depending on the nature of a firm’s earnings for the period?
37. U.S. GAAP and IFRS distinguish between revenues and expenses on the one hand and gains and losses on
the other. Which of the following is/are true?
38. What criteria must sales transactions meet in order for the seller to recognize revenues before collecting
cash?
39. _____ arise from relatively infrequent transactions, and there can be no assurance that they will recur in any
future period.
40. Which of the following is/are false?
41. The income statement is not also called the statement of
42. _____ present an ordered list, grouped by broad categories of revenues and expenses. They begin with
revenues followed by a list of expenses.
43. Common terminology, but not definitions in U.S. GAAP and IFRS, often refers to the difference between
sales and cost of sales as gross
44. Which of the following is/are true?
45. Subtraction of total operating expenses from sales yields:
46. Other (nonoperating) items follow operating expenses or the subtotal for operating profit. Most firms
reporting under U.S. GAAP separately report financing costs, such as
47. A firms decision to sell its headquarters building at a gain
48. Subtracting nonoperating expenses from operating income yields:
49. U.S. GAAP and IFRS require separate income statement display of income from continuing operations and
_____earnings that will not continue because the firm either sold, or made a decision to sell, a portion of its
business). Such a requirement aids users of the income statement in predicting future earnings.
50. Revenue recognition is among the most complex issues in financial reporting. The quantity and complexity
of the authoritative guidance for recognizing revenues result(s) from
51. A firm sells its headquarters building at a gain. This means that at the time of sale
52. As a general principle, under the accrual basis of accounting, the firm recognizes revenue when the
transaction meets which of the following conditions?
53. Which of the following is/are true?
54. Which of the following is/are not a period expense?
55. A manufacturing firm has manufacturing costs which become product costs. These manufacturing costs do
not include:
56. Which of the following is/are not examples of a period expense?
57. Which of the following is/are not a period expense?
58. Which of the following is/are not true?
59. Which of the following is/are true?
60. Under the accrual method, the timing of revenue recognition is influenced by
61. Which financial statement reports operating performance for a specific period of time?
62. Under accrual accounting, revenues are recognized when
63. Over sufficiently long time periods, the amount of net income equals
64. Recognition of revenue usually occurs when
65. Shareholders of Forest Glen Corporation have received $35,000 in dividends in the current year. At year end
the corporation has total assets of $500,000, total liabilities equal to $300,000, and contributed capital totaling
$100,000. If retained earnings at the beginning of the year was $80,000, what was Forest Glen’s net income for
the current year?
66. The income statement provides information for assessing the operating profitability of a firm. One tool used
for analysis is the common-size income statement that expresses
67. Income from continuing operations includes
68. Which of the following is/are correct?
69. Which of the following most likely would be considered a discontinued operation?
70. Which of the following statements regarding discontinued operations is true?
71. The _____ uses only sales revenues and net income and an analyst nearly always can calculate, regardless
of format and display differences in income statement presentations.
72. Revenue recognition is among the most complex issues in financial reporting. The quantity and complexity
of the authoritative guidance for recognizing revenues result(s) from
73. The sum of net income and other comprehensive income is/are:
74. Both U.S. GAAP and IFRS require firms to report the cumulative effect of other comprehensive income in a
balance sheet account called Accumulated
75. Both U.S. GAAP and IFRS require the presentation of an income statement and the presentation of the
items of Other Comprehensive Income. U.S. GAAP permits the following reporting format(s) except for:
76. While no general principle describes the nature of items excluded from net income and included in Other
Comprehensive Income, they tend to arise from remeasurements of assets and liabilities (often, remeasurements
at fair value) and not from transactions. For example, IFRS permits but does not require firms to revalue certain
noncurrent assets upward to reflect increases in fair value in excess of acquisition cost. Under IFRS, such a
revaluation remeasurement increases assets (because the firm now records an existing asset on the balance sheet
at a larger number) and increases Other Comprehensive Income. These increases are accumulated in a(n) _____
account, Revaluation Surplus.
77. Firms have considerable flexibility as to how they report other comprehensive income each period. Under
U.S. GAAP, they can include
78. Other comprehensive income for a reporting period include(s)
79. Which of the following is/are true concerning accumulated other comprehensive income?
80. Which of the following is/are not true concerning accumulated other comprehensive income?
81. Which of the following is/are true concerning accumulated other comprehensive income?
82. Both U.S. GAAP and IFRS require the presentation of an income statement and the presentation of the
items of Other Comprehensive Income. U.S. GAAP permits the following reporting format(s) except for:
83. Accumulated Other Comprehensive Income
84. U.S. GAAP and IFRS require firms to disclose unrealized gains and losses that historically have bypassed
the income statement in a category called _____.
85. Which of the following elements of financial statements is not a component of comprehensive income?
86. Assume that U.S. GAAP and IFRS require firms to remeasure the amount of a particular asset from $12
million to $8 million because of economic events. Which of the following journal entries should the company
make?
87. The formats used to present the items that are included in Other Comprehensive Income include which of
the following?
88. According to the FASB’s conceptual framework, comprehensive income includes which of the following?
Gross Profit Operating Income