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Exam 5: The Income Statement and the Statement of Cash Flows

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Question 41

Multiple Choice

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Comprehensive income is an important concept in accounting because it represents

A) all changes in equity
B) changes in equity from nonowner sources
C) changes in liabilities minus assets
D) the impact on equity of all transactions

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Question 42

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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.

Premises

Responses

Loss resulting from earthquake damage

income from continuing operations or supporting schedules

Selling expenses

extraordinary gains or losses

Loss on sale of plant assets

results from discontinued operations

Unrealized losses due to market value changes in available for sale equity security investments

statement of comprehensive income

Correction of a miscount in last year's ending goods-in-process inventory

statement of retained earnings

Cash dividends declared on common stock

footnote disclosure

Unrealized gains due to foreign currency translation adjustments

Interest revenue

Loss on sale of a major component of the business

How a company defines cash and cash equivalents

Premises

Loss resulting from earthquake damage

Selling expenses

Loss on sale of plant assets

Unrealized losses due to market value changes in available for sale equity security investments

Correction of a miscount in last year's ending goods-in-process inventory

Cash dividends declared on common stock

Unrealized gains due to foreign currency translation adjustments

Interest revenue

Loss on sale of a major component of the business

How a company defines cash and cash equivalents

Responses

income from continuing operations or supporting schedules

extraordinary gains or losses

results from discontinued operations

statement of comprehensive income

statement of retained earnings

footnote disclosure

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Correct Answer

Premises

Responses

Loss resulting from earthquake damage

Selling expenses

Loss on sale of plant assets

Unrealized losses due to market value changes in available for sale equity security investments

Correction of a miscount in last year's ending goods-in-process inventory

Cash dividends declared on common stock

Unrealized gains due to foreign currency translation adjustments

Interest revenue

Loss on sale of a major component of the business

How a company defines cash and cash equivalents

Premises

Loss resulting from earthquake damage

Selling expenses

Loss on sale of plant assets

Unrealized losses due to market value changes in available for sale equity security investments

Correction of a miscount in last year's ending goods-in-process inventory

Cash dividends declared on common stock

Unrealized gains due to foreign currency translation adjustments

Interest revenue

Loss on sale of a major component of the business

How a company defines cash and cash equivalents

Responses

Question 43

Multiple Choice

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Which of the following is not a source of a prior-period adjustment?

Exhibit 5-1 The following condensed income statement of Rahm Corporation is presented for the two years ended December 31, 2010 and 2009: $\begin{array}{lll}&2010&2009\\\text { Net sales } & \$ 10,000,000 & \$ 9,000,000 \\\text { Cost of sales } & \underline{6,000,000} & \underline{6,000,000} \\\text { Grossprofit } & \$ 4,000,000 & \$ 3,000,000\\\text { Operating expense } &2,500,000&2,000,000\\\text { Operating income } & \$ 1,500,000 & \$ 1,000,000 \\\text { Gain on sale of a component } & 900,000 & --\\&\$2,400.000&\$1,000.000\\\text { Income tax expense}&720,000&300,000\\\text { Net income}&\$1,680,000&\$700,000\end{array}$ On January 1, 2010, Rahm entered into an agreement to sell for $2, 000, 000 one of its separate operating divisions.The sale resulted in a gain on disposition of $900, 000 on November 12, 2010, and qualifies as a discontinued component.This division's contribution to Rahm's reported income before income taxes for each year was as follows: $\begin{array}{ll}2010 & \$ 700,000 \text { loss } \\2009 & \$ 400,000 \text { loss }\end{array}$ Assume an income tax rate of 30%. - Refer to Exhibit 5-1.In the preparation of a revised comparative income statement, Rahm should report income from continuing operations after income taxes for 2010 and 2009, respectively, amounting to

Reporting "changes in accounting principles" is important because

Which of the following is not part of other comprehensive income?

Other comprehensive income items may be reported at their: $\begin{array}{lll}& \text { Gross Amounts}& \text { Net of Tax Amounts}\\\text { I. } & \text { Yes } & \text { Yes } \\\text { II. } & \text { No } & \text { No } \\\text { III. } & \text { Yes } & \text { No } \\\text { IV } & \text { No } & \text { Yes }\end{array}$

A beginning accounting student has just learned how to prepare an income statement and has been told how valuable it is in the measurement of a company's profitability.However, he asks you, as an upper division accounting student, if there are any limitations to the information contained on the statement. Required: Discuss four limitations of the income statement.

Normally, a material effect from changing accounting principles should be reported

When is a company not required to report comprehensive income?

By placing the letters (a-e) in the space 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. Items may be reported in more than one location.

A review of the December 31, 2010, financial statements of Rule Corporation revealed that under the caption "extraordinary losses, " Rule had reported a total of $300, 000.Further analysis revealed that the $300, 000 in losses comprised the following items: 1.Rule recorded a gain of $\$ 80,000$ incurred in the sale of equipment. 2.In an umusual and infrequent occurrence, a loss of $\$ 250,000$ was sustained as a result of tomado damage to a manufacturing facility 3. During 2010, several factorieswere shut down chuing a najor strike by employees of Rule's major customer. Shut clown expenses totaled $\$ 100,000$ . 4. Inventory in the amount of $\$ 30,000$ waswritten off as obsolete. Ignoring income taxes, what amount of loss should Rule report as an extraordinary loss on its 2010 income statement?

The income statement information for 2010 and 2011 of the Kappy Company (a sole proprietorship)is as follows: Required: Fill in the blanks for the missing data.All the necessary information is listed.

Listed below are the three expense recognition principles followed by a series of expense items. a. association of cause and effect b. systematic and rational allocation c. immediate recogrition Required: Match the expense recognition principles to their corresponding expenses by placing the appropriate letter in the space provided.

A revenue recognition method that recognizes revenue before the time of sale is

A company is required to report earnings per share on $\begin{array}{lll}& \text {Net Income}& \text {Comprehensive Income}\\\text { I. } & \text { Yes } & \text { Yes } \\\text { II. } & \text { No } & \text { No } \\\text { III. } & \text { Yes } & \text { No } \\\text { IV } & \text { No } & \text { Yes }\end{array}$

Operating capability refers to

Which of the following sections will not appear in the statement of cash flows?

How should the gain or loss that is considered infrequent but not unusual in nature be disclosed?

Examples of matching expenses against revenues using the association of cause and effect include all of the following except