Chapter 6
Multiple Choice
1. The disposal of a significant component of a business is called
2. If year one sales equal $800,000, year two equal $840,000 and year three equals $896,000 the
percentage to be assigned for year two in a sales trend analysis, assuming that year 1 is the base
year, is
3. A measure of a company’s profitability is the
4. Which of the following is not an economic consequence of financial reporting?
5. Which of the following is not an income statement element?
6. The statement, net income should reflect all items that affected the net increase or decrease in
stockholders’ equity during the period is consistent with which of the following concepts of
income?
7. The phrase events and transactions that are distinguished by both their unusual nature and their
infrequency of occurrence describes:
8. Which of the following is not an accounting change?
9. Which of the following is not an example of an error?
10. The formula, Operating profit/Sales, is used to calculate
11. The accounts receivable turnover and inventory turnover ratios are used to analyze
12. A high accounts receivable turnover ratio indicates
13. The return on assets ratio is comprised of
14. An example of the correction of an error in previously issued financial statements is a change
15. Which of the following is characteristic of a change in an accounting estimate?
16. Which of the following items, if material in amount would normally be considered an
extraordinary item for reporting results of operations?
17. Which of the following is an example of an extraordinary item in reporting results of operations?
18. A company changed its method of inventory pricing from last-in, first-out to first-in, first-out
during the current year. Generally accepting accounting principles require that this change in
accounting method be reported by:
19. A transaction that is material in amount, unusual in nature, but not infrequent in occurrence
should be presented separately as a (an)
20. An extraordinary item should be reported separately as a component of income
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21. The correction of an error in the financial statements of a prior period should be reflected, net of
applicable income taxes, in the current
22. A loss from the disposal of a component of a business enterprise should be reported separately as
a component of income
23. A prior period adjustment should be reflected, net of applicable income taxes, in the financial
statements of a business entity in the
24. Antidilutive securities would generally be used in the calculation of
Basic Diluted
Earnings per share Earnings per share
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25. A change in the salvage value of an asset depreciated on a straight-line basis and arising because
additional information has been obtained is
26. A loss should be reported separately as a component of net income when it is unusual in nature
and which of the following?
Material Infrequent
In Amount In Occurrence
27. When a component of a business has been discontinued during the year, this component’s
operating losses of the current period up to the measurement date should be included in the
Essay
1. Discuss the economic consequences of financial reporting.
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2. Discuss the four income statements elements defined by SFAC No. 6.
3. Discuss the all inclusive vs. current operating performance views of income.
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4. Define and discuss the accounting treatment for discontinued operations.
5. Define and discuss the accounting treatment for extraordinary items.
In APB Opinion No. 30, “Reporting the Results of Operations,” extraordinary items were defined
as events and transactions that are distinguished by both their unusual nature and their
infrequency of occurrence. These characteristics were originally defined as follows.
• Unusual nature. —the event or transaction should possess a high degree of abnormality and
be unrelated or only incidentally related to ordinary activities.
• Infrequency of occurrence. —the event or transaction would not reasonably be expected to
recur in the foreseeable future. Question: given the ASC, should we remove footnotes to
original sources?
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6. What are accounting changes and why is it an issue. List and define the three types of accounting
changes.
7. Discuss the concept of simple vs. complex capital structures and how it relates to the reporting of
earnings per share.
Under the provisions of APB Opinion No. 15, a company had either a simple or complex capital
structure. A simple capital structure was comprised solely of common stock or other securities
whose exercise or conversion would not in the aggregate dilute EPS by 3 percent or more.
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8. Define and discuss the accounting treatment for prior period adjustments.
9. Define comprehensive income. What is the purpose of reporting comprehensive income?
10. Obtain a company’s income statement and ask the students to compute the following:
11. Discuss the sources of guidance for recording accounting transactions outlined by IAS No. 8,
Accounting Policies, Changes in Accounting Estimates and Errors.