89% (17 out of 19 correct)

Responses to questions are indicated by the

symbol.

1. Which of the following describes an expense?

A. Inflows or other enhancements of assets of an entity or settlements of its liabilities
during a period from delivering or producing goods, rendering services, or other
activities that constitute the entity's ongoing major or central operations.
B. Outflows or other using-up of assets or incurrences of liabilities during a period
from delivering or producing goods, rendering services, or carrying out other
activities that constitute the entity's ongoing major or central operations.
C. Increases in equity (net assets) from peripheral or incidental transactions of an
entity except those that result from revenues or investments by owners.
D. Decreases in equity (net assets) from peripheral or incidental transactions of an
entity except those that result from expenses or distributions to owners.

Incorrect. Expenses are defined as outflows or other using-up of assets or incurrences of

liabilities during a period from delivering or producing goods, rendering services, or
carrying out other activities that constitute the entity's ongoing major or central
operations.

2. A multiple-step income statement

A. highlights certain components of income that analysts use to compute ratios for
assessing the financial performance of companies.
B. separates operating transactions from nonoperating transactions.
C. matches costs and expenses with related revenues.
D. All of these answer choices are correct.

Correct! A multiple-step income statement separates operating transactions from

nonoperating transactions, and matches costs and expenses with related revenues. It
highlights certain components of income that analysts use to compute ratios for assessing
the financial performance of companies.

3. Jackson, Inc. has the following information is available:

Cost of goods sold
$148,500
Dividend revenue

3,750

Income tax expense

3,000

Operating expenses

79,500

Sales

255,000

In Jackson's's multiple-step income statement, gross profit

A. will not be reported.
B. will be reported at $24,000.
C. will be reported at $27,000.
D. will be reported at $106,500.

Correct! Gross profit = Sales Cost of goods sold.

4. The single-step income statement emphasizes

A. the gross profit and income from operations.
B. total revenues and total expenses.
C. extraordinary items and discontinued operations more than these are emphasized
in the multiple-step income statement.
D. the various components of income from continuing operations.

Correct! The single-step income statement emphasizes total revenues and total expenses.

5. All of the following would meet the criteria for an extraordinary item except gains or
losses from:
A. a major casualty.
B. prohibition under a newly enacted law or regulation.
C. an expropriation of assets.
D. loss on exchange of foreign currencies.

Correct! All of the options would be classified as extraordinary items except gains or
losses from exchange of foreign currency.

6. Losses as a result of a strike are reported as an extraordinary item.

A. True

B. False

Correct! Effects of a strike, including those against competitors and major suppliers are
not extraordinary items.

7. Which of the following are extraordinary losses?

A. Restructuring charges.
B. Losses from inventory obsolescence.
C. Impairment losses on intangible assets.
D. Flood damage losses to property where flooding is rare.

Correct! The FASB accords extraordinary item treatment to the loss from flood damages,
if flood damage in the locality is rare.

8. Irregular items, such as extraordinary items, should be reported separately following

income from continuing operations.
A. True
B. False

Correct! Income from continuing operations should be separated from irregular items to
provide statement users to differentiate between what normal and recurring and what is
not.

9. The occurrence which most likely would have no effect on 20x5 net income (assuming
that all amounts involved are material) is the
A. sale in 20x5 of an office building contributed by a stockholder in 20x1.
B. collection in 20x5 of a receivable from a customer whose account was written off
in 20x4 by a charge to the allowance account.
C. settlement based on litigation in 20x5 of previously unrecognized damages from a
serious accident which occurred in 20x3.
D. worthlessness determined in 20x5 of stock purchased on a speculative basis in
20x2.

Correct! The collection of a written off account would not affect net income.

10. The gain or loss from disposal of a component of a business is shown as a (an):
A. unusual gain or loss.
B. part of discontinued operations.
C. extraordinary item.
D. prior period adjustment.

Correct! Discontinued operations include the gain or loss from disposal of a component
of a business.

11. Which of the following statements related to noncontrolling interest is incorrect?

A. Noncontrolling interest is sometimes called minority interest.
B. Noncontrolling interest is the portion of equity interest in a subsidiary not
attributable to the parent company.
C. Noncontrolling interest in net income is reported as an expense on the income
statement.
D. Consolidated net income is allocated to the parent and to the noncontrolling
interest in proportion to their appropriate percentages of ownership.

Correct! Noncontrolling interest is reported as a separate item below net income or loss
as an allocation of the net income or loss. It is not reported as an item of income or
expense.

12. Which of the following is true about intraperiod tax allocation?

A. It arises because certain revenue and expense items appear in the income
statement either before or after they are included in the tax return.
B. It is required for extraordinary items and discontinued operations but not for prior
period adjustments.
C. Its purpose is to allocate income tax expense evenly over a number of accounting
periods.
D. Its purpose is to relate the income tax expense to the items which affect the
amount of tax.

Correct! Its purpose is to relate the income tax expense to the items which affect the
amount of tax.

13. Earnings per share is computed as net income:

A. divided by the weighted average of common shares outstanding.
B. minus preferred dividends divided by the weighted average of common shares
outstanding.
C. divided by the ending common shares outstanding.
D. minus preferred dividends divided by the ending common shares outstanding.

Correct! Net income minus preferred dividends is divided by the weighted average of
common shares outstanding to compute earnings per share.

14. Clair, Inc. reports net income of $700,000. It declares and pays preferred dividends of
$100,000 for the year, one-half of which relate to the preferred shares. The weightedaverage number of common shares outstanding during the year is 200,000 shares, and
the weighted-average number of preferred shares outstanding during the year is 10,000
shares. Earnings per share for Clair, Inc. is (round your answer to the nearest cent):
A. $3.18.
B. $3.25.
C. $3.00.
D. $2.95.

Correct! Net income minus preferred dividends is divided by the weighted average of
common shares outstanding to compute earnings per share.

15. Sawyer, Inc. consistently estimated its bad debt expense at 1 percent of credit sales. In
2014, however, Sawyer determines that it must revise upward the estimate of bad debts
for the current year's credit sales to 2 percent, or double the prior years' percentage.
Sawyer uses the revised estimate of 2% and calculates bad debt expense of $500,000.
How is the change in the estimated bad debt expense reported in Sawyer's 2014
financial statements?
A. $250,000 of expense in the income statement as an ordinary item, $250,000 of
extraordinary expense (net of tax).
B.

$250,000 of expense in the income statement as an ordinary item, $250,000 of

expense reported as an adjustment to the beginning balance of retained earnings
(net of tax).
C. $500,000 of expense reported as a change in accounting principle and accounted
for under the retrospective approach.
D. $500,000 of expense in the income statement as an ordinary item.

Correct! Sawyer accounts for this change in estimate in the period of change by
reporting the newly calculated amount of bad debt expense as an ordinary item of
income. Changes in estimate are not considered an extraordinary item, an error
correction, or a change in accounting principle.

16. Prior period adjustments are reported as:

A. an extraordinary item in the income statement.
B. an addition to (or deduction from) net income in the income statement.
C. an addition to (or a deduction from) the beginning balance of retained earnings.
D. an addition to (or deduction from) the ending balance of retained earnings.

Correct! Prior period adjustments are added to (or deducted from) the beginning
retained earnings balance.

17. The statement of stockholders' equity

A. need not be presented if a company is reporting comprehensive income using the
two statement approach.
B. is dated using As of December 31, 20x5.
C. reports the change in each stockholders' equity account and in total equity for the
period.
D. All of these answer choices are correct.

Correct! Companies present a statement of stockholders' equity regardless of the format

used to report comprehensive income and the statement is dated For the period ending
December 31, 20x5. The statement of stockholders' equity does report the change in
each stockholders' equity account and in total equity for the period.

18. Josie Corporation reported the following information for 2014:

Sales revenue

$1,000,000

Cost of goods sold

700,000

Operating expenses

110,000

Unrealized holding gain on available-for-sale

securities
Cash dividends received on the securities

40,000
4,000

For 2014, Josie would report comprehensive income of

A. $234,000.
B. $230,000.
C. $194,000.
D. $40,000.

Incorrect. $1,000,000 less $700,000 less $110,000 plus $40,000 plus $4,000 equals
$234,000.

19. Which of the following statements is incorrect?

A. Extraordinary items are prohibited under IFRS.
B. GAAP identifies certain minimum items that should be presented on the income
statement. IFRS has no minimum information requirements.
C. Compared to GAAP, the application of IFRS results in more transactions
affecting equity but not net income.
D. Both GAAP and IFRS require companies to indicate the amount of net income
attributable to noncontrolling interest.

Correct! IFRS identifies certain minimum items that should be presented on the income
statement.
GAAP has no minimum information requirements.

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