CHAPTER 5: THE INCOME STATEMENT AND THE STATEMENT OF CASH
FLOWS
1. Together with the cash flow statement, the income statement enables the investors to determine the rate of return the
company is generating relative to the amount of capital invested.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.5.1 – LO: 5.1
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2. The information reported in the income statement can be used to predict a company’s future income and cash flows.
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.5.1 – LO: 5.1
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3. The amount of money that can be distributed to shareholders as a return of capital, without being a return on capital, is
the capital financial concept.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.5.2 – LO: 5.2
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Chapter 5: The Income Statement and the Statement of Cash Flows
4. U.S. GAAP and IFRS companies commonly measure and report net income and comprehensive income.
a.
True
b.
False
True
1
Easy
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5. Revenue can be recognized either when it is earned, collection has occurred, or collection is reasonably certain to occur.
a.
True
b.
False
False
1
Easy
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6. Systematic and rational allocation is used to recognize revenue.
a.
True
b.
False
False
1
Easy
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Chapter 5: The Income Statement and the Statement of Cash Flows
7. If a company does not have any discontinued operations to list on its income statement, the labels should still be there
with a zero balance noted.
a.
True
b.
False
False
1
Easy
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8. Interperiod tax allocation involves apportioning a corporation’s total income tax expense for a period to the various
components of its net income and other comprehensive income items.
a.
True
b.
False
False
1
Moderate
ACCT.WHAL.16.5.5 – LO: 5.4
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9. When a parent company owns a majority of the common shares of a subsidiary company but not 100% of them, the
parent company will consolidate all of the subsidiary’s revenues and expenses into its financial statements.
a.
True
b.
False
True
1
Easy
ACCT.WHAL.16.5.5 – LO: 5.4
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Chapter 5: The Income Statement and the Statement of Cash Flows
10. When a company classifies a component as held for sale, it must report the component on its balance sheet at the
lower of its book value or its fair value minus costs to sell.
a.
True
b.
False
True
1
Easy
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11. A company does not have to disclose information about the sale of a discontinued component in the notes to its
financial statements until the actual sale has occurred.
a.
True
b.
False
False
1
Easy
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12. Any disposal of a large number of long-lived assets can appropriately be reported in the income statement as results
from discontinued operations.
a.
True
b.
False
False
1
Easy
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Chapter 5: The Income Statement and the Statement of Cash Flows
13. There is no prescribed income statement format under IFRS whereas U.S. GAAP requires the use of the single-step or
the multiple-step format.
a.
True
b.
False
True
1
Easy
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14. To compute earnings per share the denominator is net income attributable to common shareholders less any preferred
stock dividends for the period.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.5.8 – LO: 5.8
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15. Under U.S. GAAP or IFRS, a company can either report its comprehensive income or loss under present net income
and comprehensive income in a single continuous performance statement or report it in a separate but consecutive
financial statement.
a.
True
b.
False
True
1
Easy
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Chapter 5: The Income Statement and the Statement of Cash Flows
16. Gains or losses associated with derivative financial instruments would be included in income from continuing
operations.
a.
True
b.
False
False
1
Easy
ACCT.WHAL.16.5.9 – LO: 5.9
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17. The information contained in the statement of cash flows allows external users to assess a company’s risk, liquidity,
financial flexibility, and operating capability.
a.
True
b.
False
True
1
Easy
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18. The most common way in which to prepare the statement of cash flows is the indirect method, which is encouraged by
FASB.
a.
True
b.
False
1
Easy
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False
19. Companies with lower coverage ratios have a greater risk and a lower financial flexibility.
a.
True
b.
False
True
1
Easy
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20. The SEC scrutinizes reported earnings numbers to assess the quality of earnings and to detect any potential for
earnings management.
a.
True
b.
False
True
1
Easy
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21. A segment must pass all of the tests in order for it to be considered a reportable segment. These tests include the
revenue, profit, and asset tests.
a.
True
b.
False
False
1
Easy
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22. A company is not required to follow a specific format in making the disclosures for its segments but the FASB
encourages the most useful format for its specific circumstances.
a.
True
b.
False
True
1
Easy
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23. Who is the income statement designed to inform?
a.
creditors
b.
investors
c.
lenders
d.
The income statement is designed to inform all of these users.
d
1
Easy
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24. Operating capability refers to
a.
the ability of a company to adapt to unexpected needs and opportunities.
b.
the uncertainty or unpredictability of the future results of a company.
c.
a measure of overall company performance.
d.
a company’s ability to maintain a given level of operations.
d
1
Easy
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25. The income statement helps users
a.
b.
c.
d.
d
1
Easy
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26. Which of the following is helpful to report separately?
a.
expenses that vary with volume of activity
b.
expenses that are discretionary
c.
expenses that depend on other economic factors
d.
All of these answer choice present elements that are helpful to report separately.
d
1
Easy
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27. Which of the following is not a purpose of the income statement?
a.
used to evaluate management’s performance
b.
predicts the company’s future assets and liabilities
c.
used to compare performance against other companies
d.
assesses the company’s risk
b
1
Easy
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28. The income statement is an important financial statement for all of the following reasons, except
a.
the income statement helps shareholders evaluate management’s operating effectiveness.
b.
past income statements can be useful indicators in predicting current and future cash dividend payments as
well as future stock prices.
c.
the income statement provides useful information concerning the corporation’s ability to generate sufficient
cash flows from operations for use in payment of its operating obligations.
d.
the income statement reports the amount of net cash inflows resulting from operating, financing, and investing
activities to users.
d
1
Moderate
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29. In accrual accounting, net income is defined as
a.
Revenues − Expenses + Gains + Losses
b.
Revenues − Expenses
c.
Revenues − Expenses + Gains − Losses
d.
increase in net assets from nonowner transactions
c
1
Easy
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30. The income statement reports
a.
revenues and expenses for a given point in time.
b.
revenues and expenses for a specific date.
c.
revenues, expenses, gains and losses for a specified period of time.
d.
revenues, expenses, gains and losses for a specific date.
c
1
Easy
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31. Below is a list of account balances for Fraggle Company:
Cash
$ 123,500
Cost of Goods Sold
767,500
Gross Profit
507,500
Income before taxes
233,400
Income tax expense
?
Interest expense
14,700
Interest revenue
5,600
Inventory
113,460
Net Income
?
Number of Common Shares
150,000
Operating expenses
265,000
Operating Income
242,500
Property, plant, and equipment (net)
255,000
Receivables (net)
96,000
Sales (net)
1,275,000
What is Fraggle Company’s net income, assuming a 30% tax rate?
a.
$163,380
b.
$233,400
c.
$242,500
d.
None of these answer choices is correct.
a
1
Moderate
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32. On December 31, 2015, the net assets of Martinez Manufacturing amounted to $40,000. Net income calculated by
using the financial capital maintenance concept amounted to $12,000. During the year, additional common stock was
issued for $8,000, and $5,000 of dividends was paid. The net assets at January 1, 2015, amounted to
a.
$31,000.
b.
$37,000.
c.
$20,000.
d.
$25,000.
d
1
Moderate
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33. Georgio Company began 2015 with net assets of $80,000. Net income calculated by using the capital maintenance
concept was $21,000. During 2015, owners contributed $26,000 of new capital. By year-end, the net assets totaled
$78,000. Dividends to the owners during 2015 were
a.
$49,000.
b.
$28,000.
c.
$23,000.
d.
$2,000.
a
1
Moderate
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34. In general, revenue is recognized as being earned
a.
during the production process.
b.
upon completion of the production process.
c.
when cash is received.
d.
when goods are sold or services are rendered.
d
1
Easy
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Chapter 5: The Income Statement and the Statement of Cash Flows
35. To be recognized as revenue, an item must
a.
meet the definition of earned revenue.
b.
be earned revenue and be realized or realizable..
c.
be realized.
d.
be earned.
b
1
Easy
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36. Which of the following is not recognized by the FASB as an expense recognition principle that properly matches
expenses against revenues?
a.
immediate recognition
b.
systematic and rational allocation
c.
cash payment
d.
association of cause and effect
c
1
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37. Examples of matching expenses against revenues using the association of cause and effect include all of the following
except
a.
insurance costs.
b.
transportation costs for delivery of goods to customers.
c.
costs of products sold.
d.
sales commissions.
a
1
Easy
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38. Depreciation is an example of which expense recognition principle?
a.
association of cause and effect
b.
systematic and rational allocation
c.
cost recovery
d.
immediate recognition
b
1
Easy
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39. Which of the following expenses is an example of expense recognition under the immediate recognition principle?
a.
sales commissions
b.
depreciation
c.
management salaries
d.
transportation-out
c
1
Easy
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40. In distinguishing between revenues and gains, which of the following statements is false?
a.
More gains than revenues are beyond the entity’s control.
b.
Gains are associated more with peripheral, nonoperating activities than are revenues.
c.
GAAP does not provide precise distinctions between revenues and gains.
d.
Revenues are reported net (rather than gross) more often than gains.
d
1
Easy
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41. The major components of the income statement are listed below:
A = revenues
B = income from continuing operations
C = earnings per share
D = results from discontinued operations
E = operating income
In what sequence do they normally appear on the income statement?
a.
B-A-E-D-C
b.
E-B-A-C-D
c.
A-E-B-D-C
d.
B-D-C-D-E
c
1
Easy
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42. Which of the following are components of the income statement?
a.
revenues
b.
results from discontinued operations
c.
income from continuing operations
d.
all of these
d
1
Easy
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43. Which of the following would appear after the heading of operating income?
a.
cost of goods sold
b.
other operating income items (gains or losses)
c.
operating expenses
d.
unusual and nonrecurring gains or losses
d
1
Easy
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44. Which of the following is not a component of the income statement?
a.
unusual and nonrecurring gains and losses
b.
net income
c.
income taxes
d.
accumulated other comprehensive income
d
1
Easy
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45. The subtotal, gross profit, will be disclosed on
a.
a multiple-step income statement.
b.
both multiple-step and single-step income statements.
c.
neither multiple-step nor single-step income statements.
d.
a single-step income statement.
a
1
Easy
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46. Which of the following is not used as a caption if there is nothing to report?
a.
income from continuing operations
b.
results from discontinued operations
c.
interest expense
d.
income taxes
b
1
Easy
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47. All of the following are included in the computation of cost of goods sold except
a.
freight-out.
b.
purchase returns and allowances.
c.
beginning finished goods inventory.
d.
freight-in.
a
1
Easy
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48. From the following information, compute cost of goods sold.
Purchase returns
$ 1,200
Inventory, December 31
2,500
Freight-in
1,100
Inventory, January 1
2,800
Purchases
15,000
a.
$15,300
b.
$15,200
c.
$15,100
d.
$15,000
b
1
Easy
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49. Using the information below in the computation of cost of goods sold, what would be the appropriate amount of
Purchases?
Purchase returns
$ 1,200
Inventory, December 31
2,500
Cost of goods sold
10,500
Purchases
?
Inventory, January 1
2,500
Freight-in
1,500
a.
$10,800
b.
$11,200
c.
$ 9,700
d.
$10,200
d
1
Moderate
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50. The gross profit of Larry Company for 2015 is $300,000, cost of goods manufactured is $400,000, the beginning
inventories of goods in process and finished goods are $28,000 and $35,000, respectively, and the ending inventories
of goods in process and finished goods are $50,000 and $70,000, respectively. The cost of goods sold of Larry
Company for 2015 must have been
a.
$378,000.
b.
$265,000.
c.
$278,000.
d.
$365,000.
d
1
Moderate
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51. In 2014, Dallas Company had sales of $600,000; cost of sales of $430,000; interest expense of $12,000; and a gain on
the sale of a component of $52,000; For its income statement, Dallas uses the single-step format and the all-inclusive
concept. What was Dallas’s reported pretax income from continuing operations?
a.
$150,000
b.
$170,000
c.
$158,000
d.
c
1
Moderate
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$118,000
52. Intraperiod tax allocation
a.
is used to allocate a company’s total income tax expense to the components of net income and comprehensive
income.
b.
involves temporary (timing) differences between financial and taxable incomes.
c.
requires allocation of deferred taxes across accounting periods.
d.
results from differences between tax regulations and the principles followed to determine financial income.
a
1
Moderate
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53. Intraperiod tax allocation requires a corporation’s total income tax expense to be allocated to all of the following
except
a.
any items of other comprehensive income.
b.
other revenues and expenses.
c.
discontinued operations.
d.
prior-period adjustments.
b
1
Moderate
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54. A company that discontinues and disposes of an operation (component) should include the gain or loss on sale in the
income statement as a(n)
a.
prior-period adjustment.
b.
a component of other comprehensive income.
c.
an amount that is reported after income from continuing operations but before net income.
d.
bulk sale of fixed assets included in income from continuing operations.
c
1
Easy
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