1) The financial statements used to analyze companies include all of these statements EXCEPT
the ________.
A) balance sheet
B) income statement
C) statement of cash flows
D) statement of shareholders’ rights
2) Discontinued operations need to be treated separately from regular business operations on the
________.
A) balance sheet
B) income statement
C) statement of cash flows
D) statement of financial position
3) The FASB requires that ________ and ________ need to be separated from the regular
earnings of a business.
A) other revenues and expenses; extraordinary items
B) discontinued operations; other revenues and expenses
C) extraordinary items; discontinued operations
D) extraordinary items; changes in accounting principle
4) Extraordinary items need to be treated separately from regular business operations on the
________.
A) balance sheet
B) income statement
C) statement of cash flows
D) statement of changes in shareholders’ equity
5) A gain or loss from discontinued operations is treated on the income statement as a ________.
A) part of regular income from operations for the period
B) separate line item called other revenues and expenses
C) separate line item before taxes
D) separate line item net of taxes
6) When a company disposes of a segment of a business, the resulting gain or loss on disposal is
reported as part of ________.
A) discontinued operations
B) extraordinary items
C) other revenues and expenses
D) changes in continuing operations
7) When a company disposes of a segment of a business, this year’s operating income or loss
from the segment is reported as part of ________.
A) discontinued operations
B) extraordinary items
C) other revenues and expenses
D) changes in continuing operations
8) Items that are both unusual in nature and infrequent in occurrence are considered ________.
A) discontinued operations
B) extraordinary items
C) items of other revenues and expenses
D) changes in continuing operations
9) Extraordinary items are reported on the income statement as ________.
A) part of income from continuing operations
B) separate line items that are part of any discontinued operations
C) separate line items after income from continuing operations and after any discontinued
operations
D) items of other revenues and expenses
10) Hurricane Octavio caused $14,500 worth of damage to a warehouse in Miami owned by
Team Shirts. This loss would be reported on the income statement as part of ________.
A) discontinued operations
B) extraordinary items
C) depreciation expense
D) income from continuing operations
11) Hurricane Octavio caused $14,500 worth of damage to a warehouse in Idaho owned by Team
Shirts. This loss would be reported on the income statement as part of ________.
A) discontinued operations
B) extraordinary items
C) depreciation expense
D) income from continuing operations
12) Team Shirts sold its surfboard operations for $125,000 and incurred a loss of $47,000 on the
sale. This loss would be reported on the income statement as part of ________.
A) discontinued operations
B) extraordinary items
C) other revenues and expenses
D) income from continuing operations
13) On June 1, Team Shirts sold its surfboard operations and incurred a loss on the sale. This
year’s operating income or loss from surfboard operations before June 1 would be reported on the
income statement as part of ________.
A) discontinued operations
B) extraordinary items
C) other revenues and expenses
D) income from continuing operations
14) Team Shirts sold its surfboard operations for $125,000 and made a profit of $12,000 on the
sale. This gain would be reported on the income statement as part of ________.
A) discontinued operations
B) extraordinary items
C) other revenues and expenses
D) continuing operations
15) Lee’s Lions had to shut down its store in Houston. There was no buyer, so Lee’s Lions sold
the store equipment and closed out the business at a loss. This loss would be reported on the
income statement as part of ________.
A) continuing operations
B) discontinued operations
C) extraordinary items
D) other revenues and expenses
16) Lee’s Lions had to shut down its store in Houston on July 31. This year’s operating income or
loss from the store before July 31 would be reported on the income statement as part of
________.
A) discontinued operations
B) extraordinary items
C) other revenues and expenses
D) income from continuing operations
17) A tornado in New York City caused $48,000 worth of damage to Out of Africa’s store and
merchandise. The insurance company paid the business $50,000. The $2,000 gain would be
reported on the income statement as part of ________.
A) discontinued operations
B) extraordinary items
C) other revenues and expenses
D) continuing operations
18) Generally accepted accounting principles require that discontinued operations be reported as
________.
A) part of regular operations
B) a before-tax line item separate from continuing operations
C) an after-tax line item separate from continuing operations
D) an extraordinary item
19) Which of the following items affects retained earnings but does not affect net income?
A) extraordinary items
B) declaring dividends
C) issuing stock
D) discontinued operations
20) Which of the following items affects total shareholders’ equity without being reported on the
income statement?
A) purchase of treasury stock
B) extraordinary items
C) discontinued operations
D) repayment of long-term debt
21) Which of the following items affects total shareholders’ equity without being reported on the
income statement?
A) discontinued operations
B) extraordinary items
C) sale of common stock at a price above par
D) purchase of property, plant and equipment in exchange for a long-term note
22) Which of these could a retailing business in the Midwest classify as an extraordinary item?
A) a loss from employee embezzlement
B) a loss from a lower-of-cost-or market inventory write-down
C) a loss from selling a delivery truck at less than its book value
D) none of these are extraordinary items
23) Acme, Inc. has been profitable since its first day of operations, until the recent economic
downturn. This year, for the first time in fifty years, Acme has expenses that are greater than its
revenues. This loss should be reported on Acme’s income statement as ________.
A) an operating loss
B) an extraordinary loss
C) a loss from discontinued operations
D) a non-recurring loss
24) Earnings, or net income, is the focus of financial reporting.
25) The FASB has defined three items that need to be separated from the regular earnings of a
business: discontinued operations, other income and expenses, and extraordinary items.
26) The FASB has defined two items that need to be separated from the regular earnings of a
business and reported net of taxes: discontinued operations and extraordinary items.
27) Any part of a company that is sold off or otherwise eliminated is referred to as discontinued
operations.
28) Discontinuing a business segment is considered part of normal business operations.
29) Earnings, or net income, are important because they are used to evaluate the performance of
a firm and to predict its future performance.
30) Discontinuing a particular business segment is a non-recurring event, so this item should be
reported separately on the income statement.
31) Discontinuing a particular business segment is a non-recurring event, so it should be
classified as an extraordinary item on the income statement.
32) Events that are both unusual in nature and frequent in occurrence are considered
extraordinary items.
33) A takeover of a business segment by a foreign government could be classified as an
extraordinary item.
34) A loss from a hurricane in Florida could be classified as an extraordinary item.
35) A loss from a tornado in Kansas could be classified as an extraordinary item.
36) A loss from a tsunami in Kansas could be classified as an extraordinary item.
37) A loss from embezzlement by an employee could be classified as an extraordinary item.
38) A loss from a plane crash could be classified as an extraordinary item by an airline.
39) A manufacturer could classify a loss from a plane crashing into its factory building as an
extraordinary item.
40) What items are shown separately from income from operations on the income statement?
41) Why must discontinued operations and extraordinary items be reported separately from
income from operations on the income statement?
42) In 2011, Axle Corporation sold its computer software division to Slight Technology. During
the year of the sale, the division generated a profit of $425,000 before taxes and paid $183,750 in
taxes. The division was sold for $4,000,000 more than its book value and the taxes on this gain
were $870,000.
Required: Show how these amounts would be reported on Axle’s income statement for the year
ended December 31, 2011.
43) In 2011, Bebe’s Baby Boutique shut down its store in Paris. Operating losses for the year
were $114,000, after a tax savings of $28,000. The store’s furnishings and equipment were sold
at a loss of $175,000, which was partially offset by a tax savings of $25,000.
Required: Show how these amounts would be reported on Bebe’s income statement for the year
ended December 31, 2011.
44) In 2011, a flash flood in Death Valley destroyed Desert Dave’s Watering Hole and its entire
inventory. Net losses after insurance payments came to $34,000. The Watering Hole was able to
claim a casualty loss on its tax return and got a tax reduction of $12,000.
Required: Show how these amounts would be reported on the Watering Hole’s income
statement for the year ended December 31, 2011.
45) Ahram’s Imports had an entire shipping container of oriental rugs seized by the government
of Afghanistan in 2011. The insurance company refused to pay the estimated loss of $500,000,
since it was caused by an “act of war.” The loss will reduce Ahram’s income taxes by $70,000.
Required: Show how these amounts would be reported on Ahram’s income statement for the
year ended December 31, 2011.
46) Put an X in the appropriate box to show where each of the following items would be reported
on the income statement.
Item
Included in
income
from
continuing
operations
Below
income
from
continuing
operations
Not on the
Income
statement
Depreciation expense
Gain on discontinued operations
Credit sales
Dividends
Amortization expense
Extraordinary item
Item
Included in
income
from
continuing
operations
Below
income
from
continuing
operations
Not on the
Income
statement
Depreciation expense
Gain on discontinued operations
Credit sales
Dividends
Extraordinary item
47) What is treated as an extraordinary item on an income statement?
48) Marcy owned a small café and a catering business. Both the café and catering business were
properly combined on the financial statements that were provided to the bank and to investors.
The catering business is outperforming the café, so Marcy plans to sell the café and concentrate
on the catering business. Her accountant has told her that her income statement will be different
this year because she is selling the café. Explain to Marcy why the income statement for her
business operations has to be different this year.
1) A technique for evaluating a series of financial statement data over a period of time is called
________ analysis.
A) horizontal
B) vertical
C) financial statement
D) over-time
2) A technique for evaluating items on a single financial statement is called ________ analysis.
A) horizontal
B) vertical
C) financial statement
D) time-series
3) In vertical analysis, all items on this year’s income statement would be divided by ________.
A) total assets
B) net income
C) this year’s sales
D) sales for the base year
4) Refer to the EZ Electronics annual report above. This information is from EZ Electronics’
________.
A) income statement
B) balance sheet
C) statement of cash flows
D) statement of changes in shareholders’ equity
5) Refer to the EZ Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2011 Sales would be represented as ________.
A) 100%
B) 10%
C) 110%
D) 120%
6) Refer to the EZ Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2012 sales would be represented as ________.
A) 20%.
B) 9%.
C) 109%.
D) 120%.
7) Refer to the EZ Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2011 cost of goods sold would be represented as ________.
A) 113%
B) 133%
C) 13%
D) 33%
8) Refer to the EZ Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2012 cost of goods sold would be represented as ________.
A) 118%
B) 133%
C) 18%
D) 33%
9) Refer to the EZ Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2011 gross profit would be represented as ________.
A) 109%
B) 9%
C) 69%
D) 169%
10) Refer to the EZ Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2012 gross profit would be represented as ________.
A) 114%
B) 14%
C) 67%
D) 80%
11) Refer to the EZ Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2011 operating expenses would be represented as ________.
A) 38%
B) 105%
C) 5%
D) 40%
12) Refer to the EZ Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2012 operating expenses would be represented as ________.
A) 20%
B) 120%
C) 40%
D) 48%
13) Refer to the EZ Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2011 income before taxes would be represented as ________.
A) 13%
B) 105%
C) 31%
D) 131%
14) Refer to the EZ Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2012 income before taxes would be represented as ________.
A) 27%
B) 127%
C) 107%
D) 7%
15) Refer to the EZ Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2011 net income would be represented as ________.
A) 12%.
B) 13%.
C) 113%.
D) 22%.
16) Refer to the EZ Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2012 net income would be represented as ________.
A) (6%)
B) (1%)
C) 7%
D) 19%
17) Refer to the Ace Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2011 Sales would be represented as ________.
A) 112%
B) 12%
C) 11%
D) 1.12%
18) Refer to the Ace Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2012 Sales would be represented as ________.
A) 118%
B) 18%
C) 6%
D) 5%
19) Refer to the Ace Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2011 Cost of goods sold would be represented as ________.
A) 105%
B) 38%
C) 6%
D) 5%
20) Refer to the Ace Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2012 Cost of goods sold would be represented as ________.
A) 24%
B) 20%
C) 29%
D) 25%
21) Refer to the Ace Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2011 Gross profit would be represented as ________.
A) 116%
B) 86%
C) 14%
D) 17%
22) Refer to the Ace Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2012 Gross profit would be represented as ________.
A) 88%
B) 12%
C) (3%)
D) 13%
23) Refer to the Ace Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2011 Operating expenses would be represented as ________.
A) 113%
B) 89%
C) 11%
D) 13%
24) Refer to the Ace Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2012 Operating expenses would be represented as ________.
A) 10%
B) 11%
C) 20%
D) 25%
25) Refer to the Ace Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2011 Net income would be represented as ________.
A) 36%
B) 22%
C) 20%
D) 25%
26) Refer to the Ace Electronics annual report above. Using horizontal analysis with 2010 as the
base year, 2012 Net income would be represented as ________.
A) 90%
B) 15%
C) (11)%
D) (10)%
27) Refer to the Ace Electronics annual report above. Using vertical analysis, 2011 Sales would
be represented as ________.
A) 89%
B) 12%
C) 112%
D) 100%
28) Refer to the Ace Electronics annual report above. Using vertical analysis, 2012 Sales would
be represented as ________.
A) 5%
B) 105%
C) 118%
D) 100%
29) Refer to the Ace Electronics annual report above. Using vertical analysis, 2011 Cost of
goods sold would be represented as ________.
A) 267%
B) 105%
C) 42%
D) 38%
30) Refer to the Ace Electronics annual report above. Using vertical analysis, 2012 Cost of
goods sold would be represented as ________.
A) 16%
B) 119%
C) 125%
D) 42%
31) Refer to the Ace Electronics annual report above. Using vertical analysis, 2011 Gross profit
would be represented as ________.
A) 70%
B) 14%
C) 17%
D) 63%
32) Refer to the Ace Electronics annual report above. Using vertical analysis, 2012 Gross profit
would be represented as ________.
A) 113%
B) 68%
C) (3%)
D) 58%
33) Refer to the Ace Electronics annual report above. Using vertical analysis, 2011 Operating
expenses would be represented as ________.
A) 13%
B) 64%
C) 45%
D) 40%
34) Refer to the Ace Electronics annual report above. Using vertical analysis, 2012 Operating
expenses would be represented as ________.
A) 11%
B) 74%
C) 50%
D) 42%
35) Refer to the Ace Electronics annual report above. Using vertical analysis, 2011 Net income
would be represented as ________.
A) 20%
B) 25%
C) 36%
D) 22%