Chapter 5: The Income Statement and the Statement of Cash Flows
120. Below is a list of financial statement components with a corresponding letter code.
a.
Sales revenue (net)
b.
Cost of goods sold
c.
Selling expenses
d.
General and administrative expenses
e.
Other revenue and expenses
f.
Results from discontinued operations
g.
Prior period adjustments
h.
Additions to retained earnings (other than h)
i.
Deductions from retained earnings (other than h)
j.
Disclosures
k.
Ending balance sheet
____
1.
Merchandise inventory (beginning)
____
2.
Cash dividends declared on common stock
____
3.
Expenses incurred as a result of a strike
____
4.
Discount on bonds payable
____
5.
Loss from write-off of a significant accounts receivable (frequent, not unusual)
____
6.
Interest expense
____
7.
Transportation-in
Required:
Indicate where each component would be reported in the financial statements by inserting the corresponding code
letters in the space provided.
1.
b
2.
i
3.
e
Chapter 5: The Income Statement and the Statement of Cash Flows
121. Bradley’s Inc.’s adjusted trial balance contains the following account balances at December 31, 2016:
Cost of goods sold
$250,000
Depreciation expense
7,000
Loss on sale of equipment
5,000
Rent expense
12,000
Sales
410,000
Sales commissions
34,000
Sales discounts
22,000
Unrealized decrease in value of available for sale securities
12,000
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Challenging
ACCT.WHAL.16.5.9 – LO: 5.9
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Income taxes are 30% on all items, and there were 2,000 shares of common stock outstanding during the year.
Required:
Prepare a statement of comprehensive income.
Chapter 5: The Income Statement and the Statement of Cash Flows
122. On December 31, 2016, Melissa Company’s adjusted trial balance contained the following account balances:
Sales (net)
$175,000
Operating expenses
18,000
Unrealized decrease in value of available-for-sale securities
10,000
Cost of goods sold
100,000
The income tax rate is 30%, and the company had 2,000 shares of common stock outstanding during the year.
Required:
a.
Prepare the income statement for the year 2016 that includes comprehensive income.
b.
Prepare the income statement for the year 2016 and a separate statement of comprehensive
income.
Chapter 5: The Income Statement and the Statement of Cash Flows
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Challenging
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
123. The following are accounting items taken from the records of Paul Company for 2015:
Payment of dividends
$ 4,000
Increase in accounts payable
$15,000
Increase in accounts receivable
$19,000
Decrease in inventories
$ 6,000
Decrease in salaries payable
$14,000
Net income
$20,000
Payment for purchase of land and buildings
$60,000
Issuance of ten-year bonds payable at par
$50,000
Depreciation expense
$10,000
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Challenging
ACCT.WHAL.16.5.1 – LO: 5.1
Required:
Prepare the net cash flow from operating activities section of Paul Company’s 2015 statement of cash flows using the
indirect method.
Chapter 5: The Income Statement and the Statement of Cash Flows
124. The following are accounting items taken from the records of Sterling Company for 2016:
Payment of dividends
$24,000
Decrease in accounts payable
$19,000
Decrease in accounts receivable
$21,000
Increase in inventories
$ 6,000
Increase in salaries payable
$18,000
Net income
$42,000
Payment for purchase of land and buildings
$60,000
Issuance of ten-year bonds payable at par
$20,000
Depreciation expense
$10,000
Proceeds from sale of patent rights
$27,000
1
Challenging
ACCT.WHAL.16.5.1 – LO: 5.1
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Required:
Prepare the statement of cash flows for Sterling Company for 2016 using the indirect method.
Chapter 5: The Income Statement and the Statement of Cash Flows
125. The following items involve the cash flow activities of Prizzie Company for 2016:
Net income
$162,000
Payment of dividends
$25,000
1,000 shares of stock issued at $20 par
$20,000
Amortization expense on patents
$ 7,000
Plant assets acquired at a cost of
$75,000
Accounts receivable increase of
$ 9,000
Accounts payable decrease of
$10,000
Salaries payable increase of
$ 6,500
Beginning cash balance
$18,000
1
Challenging
ACCT.WHAL.16.5.1 – LO: 5.1
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Required:
Prepare the statement of cash flows of Prizzie Company for 2016 using the indirect method.
Chapter 5: The Income Statement and the Statement of Cash Flows
126. The following cash flows and other information pertain to Elon Company for 2016:
Proceeds from sale of stock
$25,000
Interest collected
$ 2,500
Dividends received
1,000
Payments to suppliers
12,000
Depreciation expense
1,500
Net income
12,000
Proceeds from sale of equipment
15,000
Decrease in inventory
8,000
Collections from customers
65,000
Cost of goods sold
46,000
Payments of interest
3,500
1
Challenging
ACCT.WHAL.16.5.1 – LO: 5.1
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Required:
Prepare the operating activities section of the statement of cash flows for 2016, using the direct method.
Chapter 5: The Income Statement and the Statement of Cash Flows
127. For income reporting purposes, items can appear in any of the following components of the income statement, the
statement of retained earnings, and related schedules and footnotes:
a.
income from continuing operations or supporting schedules
b.
results from discontinued operations
c.
statement of comprehensive income
d.
statement of retained earnings
e.
disclosure
Several items of accounting information are listed below:
____
1.
Selling expenses
____
2.
Loss on sale of plant assets
____
3.
Unrealized losses due to market value changes in available-for-sale equity security
investments
____
4.
Cash dividends declared on common stock
____
5.
Unrealized gains due to foreign currency translation adjustments
____
6.
Interest revenue
____
7.
Loss on sale of a major component of the business
____
8.
How a company defines cash and cash equivalents
1.
a
2.
a
3.
c
4.
d
Required:
By placing the letters (a–f) in the spaces provided above, identify where the information would be most
appropriately reported. If the information would not appear in any of the above components, place an (X) in the
space.
Chapter 5: The Income Statement and the Statement of Cash Flows
128. Tiger Corporation presents the following condensed comparative income statement for
2015, 2016, and 2017:
2017
2016
2015
Sales (net)
$ 50,000
$ 47,500
$ 45,000
Cost of Goods Sold
(17,000)
(15,000)
(13,000)
Gross Profit
$ 33,000
$ 32,500
$ 32,000
Operating expenses
(16,000)
(14,000)
(12,500)
Interest revenue
2,000
1,800
1,500
Interest expense
(1,500)
(1,750)
(2,500)
Income before income taxes
$ 17,500
$ 18,550
$ 18,500
Income tax expense
(5,250)
(5,565)
(5,550)
Net Income
$ 12,250
$ 12,985
$ 12,950
Number of shares of common stock
41,000
41,000
39,500
Earnings per share
$ 0.30
$ 0.32
$ 0.33
Required:
Prepare the rate of change analysis for Tiger 2016 and 2017.
1
Challenging
ACCT.WHAL.16.5.11 – LO: 5.11
United States – OH – Default City – AICPA: FN-Measurement
Chapter 5: The Income Statement and the Statement of Cash Flows
129. Below are the income statement and balance sheet for Lily Company:
Income Statement
Sales (net)
$1,275,000
Cost of Goods Sold
(767,500)
Gross Profit
$ 507,500
Operating expenses
(265,000)
Operating Income
$ 242,500
Interest revenue
5,600
Interest expense
(14,700)
Income before taxes
$ 233,400
Income tax expense
(70,020)
Net Income
$ 163,380
Number of shares of common stock
150,000
Balance Sheet
Cash
$ 123,500
Receivables (net)
96,000
Inventory
113,460
Property, plant, and equipment (net)
255,000
Total Assets
$ 587,960
Accounts Payable
$ 45,900
Other current liabilities
80,000
Bonds Payable
100,000
Common Stock
100,000
Additional Paid-in Capital
100,000
Retained Earnings
162,060
Total Liabilities & Shareholders’ Equity
$ 587,960
Chapter 5: The Income Statement and the Statement of Cash Flows
Required:
Compute the following ratios:
1)
Gross Profit Margin
2)
Operating Profit Margin
3)
Net Profit Margin
4)
Current Ratio
5)
Earnings per Share
1
Challenging
ACCT.WHAL.16.5.11 – LO: 5.11
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Chapter 5: The Income Statement and the Statement of Cash Flows
130. List five purposes of the income statement.
131. The SEC reported that overstating revenue and recognizing revenue too soon was the culprit in more than half of the
financial reporting frauds in the United States. As such Staff Accounting Bulletin No. 104 provided additional
guidance on revenue recognition. It emphasized four criteria for revenue recognition. What are these criteria?
132. What are the three expense recognition principles used to properly recognize expense either by matching revenues or
matching periods?
Chapter 5: The Income Statement and the Statement of Cash Flows
133. What are seven major components of a company’s income statement?
134. What is the difference between interperiod tax allocation and intraperiod tax allocation?
135. What criteria must be met in order for a company to classify a component as held for sale?
Chapter 5: The Income Statement and the Statement of Cash Flows
136. What are the four items of other comprehensive income under U.S. GAAP?
137. How does the statement of cash flows help external users assess the overall health of a company when used in
conjunction with the other financial statements?
Chapter 5: The Income Statement and the Statement of Cash Flows
138. What three tests are used to evaluate an operating segment in order to determine if it is a reportable segment?
139. The capital maintenance concept focuses on the net assets of an organization. Under this concept, periodic net
income is the change in the net assets from the beginning of the period to the end of the period, excluding owner
investments and distributions. The valuation and determination of assets and liabilities are of prime importance,
rather than the focus on revenues and expenses.
Chapter 5: The Income Statement and the Statement of Cash Flows
140. The accounting profession has developed three alternatives for matching expenses: association of cause and effect,
systematic and rational allocation, and immediate recognition. Discuss the conceptual merits of each alternative and
give two examples for each expense matching alternative.
141. Describe the major differences that still exist between the income statement information presentation requirements
under IFRS and GAAP.
Chapter 5: The Income Statement and the Statement of Cash Flows
142. In the preparation of interim income statements, the expenses are recognized differently depending on whether or not
they are directly related to product sales or services.
Required:
Discuss the general treatment of expenses in interim statements when they
a.
are directly related to product sales or services.
b.
Expenses that are directly related to product sales or services must be matched
method used for annual reporting purposes.
Challenging
ACCT.WHAL.16.5.12 – LO: 5.12
United States – OH – Default City – AICPA: FN-Decision Modeling
are not directly related to product sales or services.