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84% (16 out of 19 correct)

Responses to questions are indicated by the

symbol.

1. The income statement can be used to assess


A. liquidity.
B. solvency.
C. creditworthiness.
D. All of these answer choices are correct.

Correct! The business and investment community uses the income statement to
determine profitability, investment value, and creditworthiness.

2. The ________ approach focuses on the income-related activities that have occurred
during the period.
A. transaction.
B. capital maintenance.
C. earnings quality.
D. classification.

Correct! The transaction approach focuses on the income-related activities that have
occurred during the period. These activities include revenue and expense transactions,
and gain and loss transactions.

3. Which of the following occur from peripheral or incidental transactions?


A. Sales revenue.
B. Cost of goods sold.
C. Gain on the sale of equipment.
D. Operating expenses.

Correct! Gains and losses result from peripheral or incidental transactions.

4. In the single-step income statement:


A. interest revenue and rental revenue are reported as other revenues and gains.
B. just two groupings exist - revenues and expenses.
C. expenses are classified by functions, such as merchandising, selling and
administration.
D. an income from operations figure is presented.

Correct! Just two groupings exist in the single-step income statement - revenues and
expenses.

5. Which of the following is an acceptable method of presenting the income statement?


A. A classified income statement.
B. A current operating performance income statement.
C. A condensed income statement.
D. None of these answer choices are correct.

Correct! Acceptable presentations of the income statement include a single-step income


statement, a multiple-step income statement, and a condensed income statement.

6. How should an unusual event not meeting the criteria for an extraordinary item be
disclosed in the financial statements?
A. Shown as a separate item in operating revenues or expenses if material and
supplemented by a footnote if deemed appropriate.
B. Shown in operating revenues or expenses if material but not shown as a separate
item.
C. Shown net of income tax after ordinary net earnings but before extraordinary
items.
D. Shown net of income tax after extraordinary items but before net earnings.

Correct! Shown as a separate item in operating revenues or expenses if material and


supplemented by a footnote if deemed appropriate.

7. Which of the following is not considered an irregular item on the income statement?

A. Income tax expense.


B. Extraordinary gains.
C. Discontinued operations.
D. Extraordinary losses.

Correct! Income tax expense is a regular item on the income statement.

8. Noncontrolling interest
A. Is not shown on the face of the income statement.
B. Is reported as a separate item below net income or loss.
C. Is shown in a separate section of the income statement after continuing operations
but before extraordinary items, net of tax.
D. Is shown in a separate section of the income statement after extraordinary items,
net of tax.

Correct! Noncontrolling interest is reported as a separate item below net income or loss
as an allocation of the net income or loss (that is, it is not an item of income or expense).

9. Extraordinary items must be either unusual in nature or infrequent in occurrence.


A. True
B. False

Correct! Both criteria must be met in order for an item to be considered extraordinary.

10. Income reporting follows which of the following approaches?


A. Current operating performance.
B. Modified all-inclusive.
C. All-inclusive.
D. Modified current operating performance.

Correct! The accounting profession has adopted a modified all-inclusive concept for
income reporting and requires application of this approach in practice.

11. Companies are required to highlight certain items in the financial statements so that
users can better determine the long-run earning power of the company. Which of the
following is not one of those items?
A. Unusual gains and losses.
B. Noncontrolling interest.
C. Changes in accounting principle.
D. Discontinued operations.

Correct! A change in accounting principle is recognized by making a retrospective


adjustment to the financial statements. The four items companies are required to
highlight include unusual gains and losses, extraordinary items, discontinued
operations, and noncontrolling interest.

12. Barger Enterprises has an extraordinary loss of $300,000, an unusual gain of $700,000,
and a tax rate of 30%. At what amount should Barger report each item?
Extraordinary loss Unusual gain
1.

$(300,000)

$700,000

2.

(300,000)

490,000

3.

(210,000)

700,000

4.

(210,000)

490,000

A. 1
B. 2
C. 3
D. 4

Incorrect. $300,000 less 30% of $300,000, or $210,000 as an extraordinary loss and


$700,000 as an unusual gain.

13. Earnings per share (EPS) is calculated using only the weighted average number of
shares of common stock outstanding.
A. True

B. False

Correct! EPS is calculated using only the weighted average number of shares of
common stock outstanding.

14. A change in the method of inventory pricing from FIFO to LIFO would be accounted
for as a (an):
A. part of discontinued operations.
B. extraordinary item.
C. change in accounting principle.
D. change in estimate.

Correct! Changes in accounting principle include a change in the method of inventory


pricing.

15. When a company transfers an amount of restricted retained earnings into a different
account, that account is titled
A. Appropriated Retained Earnings.
B. Unappropriated Retained Earnings.
C. Noncontrolling Retained Earnings.
D. Comprehensive Retained Earnings.

Incorrect. When a company transfers an amount of restricted retained earnings into a


different account, that account is titled Appropriated Retained Earnings.

16. Gains and losses that bypass net income but affect stockholders' equity are referred to
as:
A. comprehensive income.
B. other comprehensive income.
C. prior period income.
D. unusual gains and losses.

Correct! Other comprehensive income includes gains and losses that bypass net income.

17. The nature-of-expense method


A. is simple to apply.
B. is viewed as more relevant.
C. identifies the major cost drivers of the company.
D. All of these answer choices are correct.

Incorrect. The function-of-expense method is viewed as more relevant because it


identifies the major cost drivers of the company and therefore helps users assess
whether these amounts are appropriate for the revenue generated.

18. Which limitation of an income statement occurs when one company uses an accelerated
depreciation method while another company uses straight-line depreciation?
A. Companies omit from the income statement items they cannot measure reliably.
B. Income measurement involves judgment.
C. Income numbers are affected by the accounting methods employed.
D. All of these answer choices are correct.

Correct! An example of income numbers being affected by the accounting methods


employed is usage of different depreciation methods. An example of how income
measurement involves judgment would be when companies use different useful lives to
depreciate similar assets. An example of how a company omits items that cannot be
measured reliably is that a company may not record unrealized gains and losses on
certain investment securities in income when there is uncertainty that it will ever realize
the changes in value.

19. The major elements of the income statement are


A. revenue, cost of goods sold, selling expenses, and general expense.
B. operating section, non-operating section, discontinued operations, and
extraordinary items.
C. revenues, expenses, gains, and losses.
D. revenue, cost of goods sold, operating expenses, non-operating section.

Correct! The major elements of the income statement are revenues, expenses, gains, and
losses.

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