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CONCEPT CHECKERS – INCOME STATEMENT

1. For a nonfinancial firm, are depreciation expense and interest expense included or
excluded from operating expenses in the income statement?

Depreciation expense Interest expense

a. Included Included

b. Included Excluded

c. Excluded Included

2. Are income taxes and cost of goods sold examples of expenses classified by nature or
classified by function in the income statement?

Income taxes Cost of goods sold

a. Nature Function

b. Function Nature

c. Function Function

3. Which of the following is least likely a condition necessary for revenue recognition?

a. Cash has been collected

b. The goods have been delivered

c. The price has been determined

4. AAA has a contract to build a building for $100.000 with an estimated time to
completion of three years. A reliable cost estimate for the project is $60.000. In the first
year of the project, AAA incurred costs totaling $24.000. How much profit should AAA
report at the end of the first year under the percentage of completion method and the
completed contract method?

Percentage of completion Completed contract

a. $16.000 $0

b. $16.000 $40.000
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c. $40.000 $0

5. Which principle requires that cost of goods sold be recognized in the same period in
which the sale of related inventory is recorded?

a. Going concern

b. Certainty

c. Matching

6. When accounting for inventory, are the FIFO and LIFO cost flow assumptions
permitted under US.GAAP?

FIFO LIFO

a. Yes Yes

b. Yes No

c. No Yes

7. Which of the following best describes the impact of depreciation equipment with a
useful life of 6 years using the declining balance method as compared to the straight line
method?

a. Total depreciation expense will be higher over the life of the equipment

b. Depreciation expense will be higher in the first year

c. Scrapping the equipment after five years will result in a larger loss.

8. CC Corporation reported the following inventory transactions for the year:

Purchase Sales
40 units at $30 13 units at $35
20 units at $40 35 units at $45
90 units at $50 60 units at $60
Assuming inventory at the beginning of the year was zero, calculate the year - end
inventory using FIFO and LIFO

FIFO LIFO

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a. $5.220 $1.040

b. $2.100 $1.280

c. $2.100 $1.040

9. At the beginning of the year, Triple W Corporation purchased a new piece of

equipment to be used in its manufacturing operation. The cost of the equipment was
$25.000. The equipment is expected to be used for 4 years and then sold for $4000.
Depreciation expense to be reported for the second year using the DDB method is closest
to:

a. $5.250

b. $6.250

c. $7.000

10. Which of the following transactions affects owner’s equity but does not affect net
income?

a. Foreign currency translation gain

b. Repaying the face amount on a bond issued at par

c. Dividends received from available for sale securities.

11. Which of the following is least likely to be included when calculating comprehensive
income?

a. Unrealized loss from cash flow hedging derivatives

b. Unrealized gain from available for sale securities

c. Dividends paid to common shareholders.

12. A vertical common size income statement expresses each category of the income
statement as a percentage of:

a. Assets

b. Gross profit

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c. Revenue

13. AAA has a contract to build a building for $100.000 with an estimated time to
completion of three years. A reliable cost estimate for the project is $60.000. In the first
year of the project, AAA incurred costs totaling $12.000. How much profit should AAA
report at the end of the first year under the percentage of completion method and the
completed contract method?

Percentage of completion Completed contract

a. $8.000 $0

b. $8.000 $20.000

c. $20.000 $0

14. AAA has a contract to build a building for $100.000 with an estimated time to
completion of three years. A reliable cost estimate for the project is $60.000. In the first
year of the project, AAA incurred costs totaling $12.000. In the second year of the
project, AAA incurred costs totaling $36.000. How much profit should AAA report at the
end of the second year under the percentage of completion method and the completed
contract method?

Percentage of completion Completed contract

a. $16.000 $0

b. $60.000 $40.000

c. $24.000 $0

15. Littlefield Company recently purchased a machine at a cost of $20.000. The machine
is expected to have a residual value of $2.000 at the end of its useful life in five years.
Calculate depreciation expense using the straight line method.

a. $4.000

b. $3.600

c. 4.600

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16. Littlefield Company recently purchased a machine at a cost of $20.000. The machine
is expected to have a residual value of $2.000 at the end of its useful life in five years.
Calculate depreciation expense in first year using the DDB method.

a. $4.000

b. $7.200

c. 8.000

17. Littlefield Company recently purchased a machine at a cost of $20.000. The machine
is expected to have a residual value of $2.000 at the end of its useful life in five years.
Calculate depreciation expense in second year using the DDB method.

a. $4.800

b. $4.000

c. 3.600

18. Fill in the blank:

Revenue 100.000

COGS 2.000

Gross profit 98.000

Selling, administrative expense 5000

Depreciation expense 2000

Operating profit 91.000

Interest expense 1000

Income before tax 90.000

Provision for income tax 20.000

Income for continuing operations 70.000

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Earnings (losses) from discontinued 1.000

operations, net of tax

Net income 69.000

Calculate ratios that you’ve learnt from this chapter

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