nTrue/False Questions
1. Income from continuing operations sometimes includes gains from nonoperating activities.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 04-01
Topic Area: Income from continuing operations
Blooms: Remember
AACSB: Reflective thinking
AICPA: FN Measurement
2. Intraperiod tax allocation is the process of associating income tax effects with the income statement components that create those effects.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 04-04
Topic Area: Discontinued operations
Blooms: Remember
AACSB: Reflective thinking
AICPA: FN Measurement
3. Material restructuring costs are reported as an element of income from continuing operations.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 04-01
Learning Objective: 04-03
Topic Area: Income from continuing operations
Topic Area: Restructuring costs
Blooms: Remember
AACSB: Reflective thinking
AICPA: FN Measurement
4. Earnings quality refers to the ability of reported earnings (income) to predict future earnings.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 04-02
Topic Area: Earnings quality management
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
5. Gains, but not losses, from discontinued operations must be separately reported in an income statement.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 04-04
Topic Area: Discontinued operations
Blooms: Remember
AACSB: Reflective thinking
AICPA: FN Measurement
6. Income statements prepared according to both U.S. GAAP and International Financial Reporting Standards require the separate reporting of discontinued operations.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 04-04
Learning Objective: 04-09
Topic Area: Discontinued operations
Topic Area: IFRS – Income statement
Blooms: Remember
AACSB: Reflective thinking
AACSB: Diversity
AICPA: BB Global
AICPA: FN Measurement
7. Earnings per share disclosure is required only for income from continuing operations.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 04-05
Topic Area: Earnings per share
Blooms: Remember
AACSB: Reflective thinking
AICPA: FN Measurement
8. Comprehensive income reports an expanded version of income to include certain types of gains and losses not included in traditional income statements.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 04-06
Topic Area: Comprehensive income
Blooms: Remember
AACSB: Reflective thinking
AICPA: FN Measurement
9. Comprehensive income is the total change in shareholders’ equity that occurred during the period.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 04-06
Topic Area: Comprehensive income
Blooms: Remember
AACSB: Reflective thinking
AICPA: FN Measurement
10. The direct and indirect methods of reporting the statement of cash flows present different information for investing and financing activities.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 04-08
Topic Area: Statement of cash flows – Classifying cash flows
Blooms: Remember
AACSB: Reflective thinking
AICPA: FN Measurement
11. International Financial Reporting Standards require a company to classify expenses in an income statement by function.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 04-01
Learning Objective: 04-09
Topic Area: Income from continuing operations
Topic Area: IFRS – Income statement
Blooms: Remember
AACSB: Reflective thinking
AACSB: Diversity
AACSB: Global
AICPA: FN Measurement
12. In a statement of cash flows prepared under International Financial Reporting Standards, interest received is most often classified as an operating cash flow.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 04-08
Learning Objective: 04-09
Topic Area: Statement of cash flows – Classifying cash flows
Topic Area: IFRS – Statement of cash flows
Blooms: Remember
AACSB: Reflective thinking
AACSB: Diversity
AICPA: BB Global
FN Measurement
13. In a statement of cash flows prepared under International Financial Reporting Standards, interest paid is most often classified as a financing cash flow.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 04-08
Learning Objective: 04-09
Topic Area: Statement of cash flows – Classifying cash flows
Topic Area: IFRS – Statement of cash flows
Blooms: Remember
AACSB: Reflective thinking
AACSB: Diversity
AICPA: BB Global
FN Measurement
Multiple Choice Questions
14. Intraperiod income tax presentation is primarily a matter of:
a. Valuation.
b. Going concern.
c. Periodicity.
d. Allocation.
Answer: d
Level of Learning: 1 Easy
Learning Objective: 04-04
Topic Area: Discontinued operations
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
15. The difference between single-step and multiple-step income statements is primarily an issue of:
a. Consistency.
b. Presentation.
c. Measurement.
d. Valuation.
Answer: b
Level of Learning: 1 Easy
Learning Objective: 04-01
Topic Area: Income statement formats
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
16. Popson Inc. incurred a material loss that was unusual in character. This loss should be reported as:
a. A discontinued operation.
b. A line item between income from continuing operations and income from discontinued operations.
c. A line item within income from continuing operations.
d. A line item in the retained earnings statement.
Answer: c
Level of Learning: 2 Medium
Learning Objective: 04-01
Topic Area: Income from continuing operations
Blooms: Understand
AACSB: Reflective thinking
AICPA: FN Measurement
17. Provincial Inc. reported the following before-tax income statement items:
|
Operating income |
$600,000 |
|
Loss on discontinued operations |
100,000 |
Provincial has a 30% income tax rate.
Provincial would report the following amount of income tax expense as a line item in the income statement:
a. $198,000.
b. $180,000.
c. $168,000.
d. $150,000.
Answer: b
Level of Learning: 2 Medium
Learning Objective: 04-01
Topic Area: Income tax expense
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback: $600,000 x 30% = $180,000
18. Freda's Florist reported the following before-tax income statement items for the year ended December 31, 2016:
|
Operating income |
$250,000 |
|
Income on discontinued operations |
$ 70,000 |
All income statement items are subject to a 40% income tax rate. In its 2016 income statement, Freda's separately stated income tax expense and total income tax expense would be:
a. $128,000 and $128,000, respectively.
b. $128,000 and $100,000, respectively.
c. $100,000 and $128,000, respectively.
d. $100,000 and $100,000, respectively.
Answer: c
Level of Learning: 3 Hard
Learning Objective: 04-01
Learning Objective: 04-04
Topic Area: Income tax expense
Topic Area: Discontinued operations
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
|
Income tax expense stated separately |
|
|
|
($250,000 x 40%) |
$100,000 |
|
|
Tax expense due to discontinued operations |
|
|
|
($70,000 x 40%) |
28,000 |
|
|
Total income tax expense |
|
$128,000 |
|
|
|
|
19. Pro forma earnings:
a. Could be considered management's view of permanent earnings.
b. Are needed for the correction of errors.
c. Are standardized under generally accepted accounting principles
d. Are useful to compare two different firms' performance.
Answer: a
Level of Learning: 1 Easy
Learning Objective: 04-02
Topic Area: Earnings quality management
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
20. The distinction between operating and nonoperating income relates to:
a. Continuity of income.
b. Primary activities of the reporting entity.
c. Consistency of income stream.
d. Reliability of measurements.
Answer: b
Level of Learning: 2 Medium
Learning Objective: 04-01
Learning Objective: 04-03
Topic Area: Income from continuing operations
Topic Area: Earnings quality components
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
21. The principal benefit of separately reporting discontinued operations is to enhance:
a. Predictive ability of future profitability.
b. Consistency in reporting.
c. Intraperiod continuity.
d. Comprehensive reporting.
Answer: a
Level of Learning: 2 Medium
Learning Objective: 04-04
Topic Area: Discontinued operations
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
22. The Claxton Company manufactures children’s toys and also has a division that makes automobile parts. Due to a change in its strategic focus, the company sold the automobile parts division. The division qualifies as a component of the entity according to GAAP. How should Claxton report the sale in its 2016 income statement?
a. Report it as restructuring costs.
b. Report it as a discontinued operation.
c. Report the income or loss from operations of the division in discontinued operations.
d. Report it as a gain on sale of investments included in income from continuing operations.
Answer: b
Level of Learning: 2 Medium
Learning Objective: 04-04
Topic Area: Discontinued operations
Blooms: Understand
AACSB: Reflective thinking
AICPA: FN Measurement
23. On August 1, 2016, Rocket Retailers adopted a plan to discontinue its catalog sales division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by June 30, 2017. On January 31, 2017, Rocket's fiscal year-end, the following information relative to the discontinued division was accumulated:
|
Operating loss Feb. 1, 2016–Jan. 31, 2017 |
$115,000 |
|
Estimated operating losses, Feb. 1–June 30, 2017 |
80,000 |
|
Impairment of division assets at Jan. 31, 2017 |
10,000 |
In its income statement for the year ended January 31, 2017, Rocket would report a before-tax loss on discontinued operations of:
a. $115,000.
b. $195,000.
c. $ 65,000.
d. $125,000.
Answer: d
Level of Learning: 2 Medium
Learning Objective: 04-04
Topic Area: Discontinued operations
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback: $(115,000) + $(10,000) = $(125,000)
24. On November 1, 2016, Jamison Inc. adopted a plan to discontinue its barge division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by April 30, 2017. On December 31, 2016, the company's year-end, the following information relative to the discontinued division was accumulated:
|
Operating loss Jan. 1–Dec. 31, 2016 |
$65 million |
|
Estimated operating losses, Jan. 1 to April 30, 2017 |
80 million |
|
Excess of fair value, less costs to sell, over book value at Dec. 31, 2016 |
15 million |
In its income statement for the year ended December 31, 2016, Jamison would report a before-tax loss on discontinued operations of:
a. $ 65 million.
b. $ 50 million.
c. $130 million.
d. $145 million.
Answer: a
Level of Learning: 2 Medium
Learning Objective: 04-04
Topic Area: Discontinued operations
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Use the following information for questions 25 and 26:
On October 28, 2016, Mercedes Company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations and was properly classified as held for sale on December 31, 2016, the end of the company’s fiscal year. The division’s loss from operations for 2016 was $2,000,000.
25. The division’s book value and fair value less cost to sell on December 31 were $3,000,000 and $2,500,000, respectively. What before-tax amount(s) should Mercedes report as loss on discontinued operations in its 2016 income statement?
a. $2,000,000 loss.
b. $2,500,000 loss.
c. No loss would be reported.
d. $500,000 impairment loss included in continuing operations and a $2,000,000 loss from discontinued operations.
Answer: b
Level of Learning: 3 Hard
Learning Objective: 04-04
Topic Area: Discontinued operations
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback: $2,000,000 loss from operations and $500,000 impairment loss = $2,500,000.
26. The division’s book value and fair value less cost to sell on December 31 were $3,000,000 and $3,500,000, respectively. What before-tax amount(s) should Mercedes report as loss on discontinued operations in its 2016 income statement?
a. $2,000,000 loss.
b. $2,500,000 loss.
c. No loss would be reported.
d. $500,000 gain included in continuing operations and a $2,000,000 loss from discontinued operations.
Answer: a
Level of Learning: 3 Hard
Learning Objective: 04-04
Topic Area: Discontinued operations
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback: $2,000,000 loss from operations only. There is no impairment loss.
Use the following to answer questions 27–31:
On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for $80 million. The sale was completed on December 31, 2016.
The following additional facts pertain to the transaction:
· The Footwear Division qualifies as a component of the entity according to GAAP regarding discontinued operations.
· The book value of Footwear's assets totaled $48 million on the date of the sale.
· Footwear's operating income was a pre-tax loss of $10 million in 2016.
· Foxtrot's income tax rate is 40%.
27. In the 2016 income statement for Foxtrot Co., it would report:
a. Income (loss) on its total operations for the year without separation.
b. Income (loss) on its continuing operation only.
c. Income (loss) from its continuing and discontinued operations separately.
d. Income and gains separately from losses.
Answer: c
Level of Learning: 2 Medium
Learning Objective: 04-04
Topic Area: Discontinued operations
Blooms: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking.
AICPA: FN Measurement
28. In the 2016 income statement for Foxtrot Co., it would report:
a. All income taxes combined into one line item.
b. Income taxes separated for continuing and discontinued operations.
c. Income taxes reported for income and gains only.
d. None of the other answers is correct.
Answer: b
Level of Learning: 2 Medium
Learning Objective: 04-04
Topic Area: Discontinued operations
Blooms: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
29. In the 2016 income statement for Foxtrot Co., it would report income from discontinued operations of:
a. $ 9.2 million.
b. $13.2 million.
c. $ 22 million.
d. $ 26 million.
Answer: b
Level of Learning: 3 Hard
Learning Objective: 04-04
Topic Area: Discontinued operations
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback: 60% (i.e., 1 – tax rate) x $22 million ($32 million gain on asset sale –$10 million operating loss)
30. Suppose that the Footwear Division's assets had not been sold by December 31, 2016, but were considered held for sale. Assume that the fair value of these assets at December 31 was $40 million. In the 2016 income statement for Foxtrot Co., it would report a loss from discontinued operations of:
a. $ 3 million loss.
b. $ 10 million loss.
c. $10.8 million loss.
d. $ 18 million loss.
Answer: c
Level of Learning: 3 Hard
Learning Objective: 04-04
Topic Area: Discontinued operations
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback: 60% (i.e., 1 – tax rate) x $18 million loss ($8 million impairment loss on Footwear's assets + $10 million operating loss = $18 million pretax loss).
31. Suppose that the Footwear Division's assets had not been sold by December 31, 2016, but were considered held for sale. Assume that the fair value of these assets at December 31 was $80 million. In the 2016 income statement for Foxtrot Co., under discontinued operations it would report a:
a. $ 6 million loss.
b. $ 10 million loss.
c. $13.2 million income.
d. None of the other answers is correct.
Answer: a
Level of Learning: 3 Hard
Learning Objective: 04-04
Topic Area: Discontinued operations
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback: 60% of the $10 million operating loss. There is no impairment of assets and only impairments are included if the assets are still held for sale.
32. Major Co. reported 2016 income of $300,000 from continuing operations before income taxes and a before-tax loss on discontinued operations of $80,000. All income is subject to a 30% tax rate. In the 2016 income statement, Major Co. would show the following line-item amounts for income tax expense and net income:
a. $66,000 and $210,000.
b. $90,000 and $154,000.
c. $90,000 and $276,000.
d. $66,000 and $220,000.
Answer: b
Level of Learning: 3 Hard
Learning Objective: 04-01
Learning Objective: 04-04
Topic Area: Income tax expense
Topic Area: Discontinued operations
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
|
Income from continuing operations before income taxes |
$300,000 |
|
|
Income tax expense |
90,000 |
|
|
Income from continuing operations |
$210,000 |
|
|
Loss on discontinued operations (net of $24,000 tax benefit) |
(56,000 |
) |
|
Net income |
$154,000 |
|
|
|
|
|
33. Howard Co.'s 2016 income from continuing operations before income taxes was $280,000. Howard Co. reported before-tax income on discontinued operations of $50,000. All tax items are subject to a 40% tax rate. In its income statement for 2016, Howard Co. would show the following line-item amounts for net income and income tax expense:
a. $198,000 and $112,000.
b. $230,000 and $92,000.
c. $330,000 and $132,000.
d. $198,000 and $79,000.
Answer: a
Level of Learning: 3 Hard
Learning Objective: 04-01
Learning Objective: 04-04
Topic Area: Income tax expense
Topic Area: Discontinued operations
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement Feedback:
|
Income from continuing operations before income taxes |
$280,000 |
|
Income tax expense ($280,000 x 40%) |
112,000 |
|
Income from continuing operations |
$168,000 |
|
Income on discontinued operations (net of $20,000 tax expense) |
30,000 |
|
Net income |
$198,000 |
|
|
|
Use the following to answer questions 34 and 35:
Misty Company reported the following before-tax items during the current year:
|
Sales revenue |
$600 |
|
Operating expenses |
250 |
|
Restructuring charges |
20 |
|
Loss on discontinued operations |
50 |
Misty's effective tax rate is 40%.
34. What is Misty's income from continuing operations?
a. $198.
b. $210.
c. $330.
d. $360.
Answer: a
Level of Learning: 3 Hard
Learning Objective: 04-01
Learning Objective: 04-03
Topic Area: Income from continuing operations
Topic Area: Restructuring costs
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback: ($600 – 250 – 20) x (1 –.4) = $198
35. What is Misty's net income for the current year?
a. $148.
b. $168.
c. $112.
d. None of the amounts given are correct.
Answer: b
Level of Learning: 3 Hard
Learning Objective: 04-01
Learning Objective: 04-03
Learning Objective: 04-04
Topic Area: Income tax expense
Topic Area: Restructuring costs
Topic Area: Discontinued operations
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
|
Income from continuing operations before taxes |
|
|
|
($600 – 250 – 20) |
$330 |
|
|
Income tax expense ($330 x 40%) |
132 |
|
|
Income from continuing operations |
198 |
|
|
Loss on discontinued operations (net of $20 tax benefit) |
(30 |
) |
|
Net income |
$168 |
|
36. Cendant Corporation’s results for the year ended December 31, 2016, include the following material items:
Sales revenue $6,200,000
Cost of goods sold 3,800,000
Selling and administrative expenses 1,300,000
Loss on sale of investments 200,000
Loss on discontinued operations 500,000
Restructuring costs 80,000
Cendant Corporation’s income from continuing operations before income taxes for 2016 is:
a. $900,000.
b. $880,000.
c. $820,000
d. $320,000.
Answer: c
Level of Learning: 3 Hard
Learning Objective: 04-01
Learning Objective: 04-03
Topic Area: Income from continuing operations
Topic Area: Restructuring costs
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback: $6,200,000 – 3,800,000 – 1,300,000 – 200,000 – 80,000 = $820,000
37. Which of the following is not true about EPS?
a. It must be reported by all corporations whose stock is publicly traded.
b. It must be reported separately for discontinued operations.
c. It must be reported on operating income.
d. None of the other answers is correct.
Answer: c
Level of Learning: 1 Easy
Learning Objective: 04-05
Topic Area: Earnings per share
Blooms: Remember
AACSB: Reflective thinking
AICPA: FN Measurement
38. The Maytag Corporation's income statement includes income from continuing operations and a loss on discontinued operations. Earnings per share information would be provided for:
a. Net income only.
b. Income from continuing operations and net income only.
c. Income from continuing operations, loss on discontinued operations, and net income only.
d. None of the other answers is correct.
Answer: c
Level of Learning: 2 Medium
Learning Objective: 04-05
Topic Area: Earnings per share
Blooms: Understand
AACSB: Reflective thinking
AICPA: FN Measurement
39. Each of the following would be reported as items of other comprehensive income except:
a. Foreign currency translation gains.
b. Unrealized gains on investments accounted for as securities available for sale.
c. Deferred gains from derivatives.
d. Gains from the sale of equipment.
Answer: d
Level of Learning: 1 Easy
Learning Objective: 04-06
Topic Area: Comprehensive income components
Blooms: Remember
AACSB: Reflective thinking
AICPA: FN Measurement
40. Reporting comprehensive income can be accomplished by each of the following methods except:
a. In the statement of shareholders’ equity.
b. A single, continuous statement of comprehensive income.
c. In two separate, but consecutive statements.
d. All of the above are acceptable methods.
Answer: a
Level of Learning: 1 Easy
Learning Objective: 04-06
Topic Area: Comprehensive income presentation
Blooms: Remember
AACSB: Reflective thinking
AICPA: FN Measurement
41. Reporting comprehensive income according to International Financial Reporting Standards can be accomplished by each of the following methods except:
a. In the statement of shareholders’ equity.
b. A combined statement of income and comprehensive income.
c. In two separate statements.
d. The entity may choose either a combined statement of income and comprehensive income or two separate statements.
Answer: a
Level of Learning: 1 Easy
Learning Objective: 04-06
Learning Objective: 04-09
Topic Area: Comprehensive income presentation
Topic Area: IFRS – Comprehensive income
Blooms: Remember
AACSB: Diversity
AICPA: BB Global
AICPA: FN Measurement
42. Comprehensive income is the change in equity from:
a. Owner transactions.
b. Nonowner transactions.
c. Owner or nonowner transactions.
d. Capital transactions.
Answer: b
Level of Learning: 1 Easy
Learning Objective: 04-06
Topic Area: Comprehensive income
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
43. Reconciliation between net income and comprehensive income would include:
a. Unrealized losses but not unrealized gains on available for sale securities.
b. Unrealized gains but not unrealized losses on available for sale securities.
c. Unrealized losses and unrealized gains on available for sale securities.
d. Neither unrealized losses nor unrealized gains on available for sale securities.
Answer: c
Level of Learning: 2 Medium
Learning Objective: 04-06
Topic Area: Comprehensive income components
Blooms: Understand
AACSB: Reflective thinking
AICPA: FN Measurement
44. Change statements include a:
a. Retained earnings statement, balance sheet, and cash flow statement.
b. Balance sheet, cash flow statement, and income statement.
c. Cash flow statement, income statement, and retained earnings statement.
d. Retained earnings statement, balance sheet, and income statement.
Answer: c
Level of Learning: 1 Easy
Learning Objective: 04-07
Topic Area: Statement of cash flows
Blooms: Remember
AACSB: Reflective thinking
AICPA: FN Measurement
45. In comparing the direct method with the indirect method of preparing the statement of cash flows:
a. Only operating activities are presented differently.
b. Only investing activities are presented differently.
c. Only financing activities are presented differently.
d. All activities are presented differently.
Answer: a
Level of Learning: 1 Easy
Learning Objective: 04-08
Topic Area: Statement of cash flows – Presentation
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
46. The statement of cash flows reports cash flows from the activities of:
a. Operating, purchasing, and investing.
b. Borrowing, paying, and investing.
c. Financing, investing, and operating.
d. Using, investing, and financing.
Answer: c
Level of Learning: 1 Easy
Learning Objective: 04-08
Topic Area: Statement of cash flows – Classifying cash flows
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
47. Operating cash flows would exclude:
a. Interest received.
b. Interest paid.
c. Dividends paid.
d. Dividends received.
Answer: c
Level of Learning: 2 Medium
Learning Objective: 04-08
Topic Area: Statement of cash flows – Classifying cash flows
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
48. Operating cash outflows would include:
a. Purchase of investments.
b. Purchase of equipment.
c. Payment of cash dividends.
d. Purchases of inventory.
Answer: d
Level of Learning: 1 Easy
Learning Objective: 04-08
Topic Area: Statement of cash flows – Classifying cash flows
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
49. Cash flows from investing do not include cash flows from:
a. Lending money to another corporation.
b. The sale of equipment.
c. Borrowing.
d. The purchase of other corporation's securities.
Answer: c
Level of Learning: 1 Easy
Learning Objective: 04-08
Topic Area: Statement of cash flows – Classifying cash flows
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
50. Cash flows from financing activities include:
a. Interest received.
b. Interest paid.
c. Dividends received.
d. Dividends paid.
Answer: d
Level of Learning: 2 Medium
Learning Objective: 04-08
Topic Area: Statement of cash flows – Classifying cash flows
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
51. Cash flows from investing activities do not include:
a. Proceeds from issuing bonds.
b. Payment for the purchase of equipment.
c. Proceeds from the sale of marketable securities.
d. Cash outflows from acquiring land.
Answer: a
Level of Learning: 2 Medium
Learning Objective: 04-08
Topic Area: Statement of cash flows – Classifying cash flows
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
52. The FASB's stated preference for reporting operating cash flows is the:
a. Indirect method.
b. Direct method.
c. Working capital method.
d. All financial resources method.
Answer: b
Level of Learning: 2 Medium
Learning Objective: 04-08
Topic Area: Statement of cash flows – Presentation
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
53. In the operating activities section of the statement of cash flows, we start with net income:
a. In the direct method.
b. In the indirect method.
c. In both the direct and the indirect methods.
d. In neither the direct nor the indirect methods.
Answer: b
Level of Learning: 1 Easy
Learning Objective: 04-08
Topic Area: Statement of cash flows – Indirect method
Blooms: Remember
AACSB: Reflective thinking
AICPA: FN Measurement
54. Which of the following is added to net income as an adjustment under the indirect method of preparing the statement of cash flows?
a. Salaries payable decrease.
b. Gain on the sale of land.
c. Loss on the sale of equipment.
d. Accounts receivable increase.
Answer: c
Level of Learning: 2 Medium
Learning Objective: 04-08
Topic Area:
Topic Area: Statement of cash flows – Indirect method
Blooms: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement
55. Schneider Inc. had salaries payable of $60,000 and $90,000 at the end of 2015 and 2016, respectively. During 2016, Schneider recorded $620,000 in salaries expense in its income statement. Cash outflows for salaries in 2016 were:
a. $590,000.
b. $620,000.
c. $650,000.
d. $530,000.
Answer: a
Level of Learning: 2 Medium
Learning Objective: 04-08
Topic Area: Statement of cash flows – Direct method
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback: $620,000 –$30,000 increase in salaries payable = $590,000.
56. Tropical Tours reported revenue of $400,000 for its year ended December 31, 2016. Accounts receivable at December 31, 2015 and 2016, were $35,000 and $32,000, respectively. Using the direct method for reporting cash flows from operating activities, Tropical Tours would report cash collected from customers of:
a. $400,000.
b. $397,000.
c. $403,000.
d. $365,000.
Answer: c
Level of Learning: 2 Medium
Learning Objective: 04-08
Topic Area: Statement of cash flows – Direct method
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
|
Accounts Receivable |
|
|
12/31/15 35,000 |
|
|
Sales 400,000 |
? |
|
12/31/16 32,000 |
|
Cash collections = $35,000 + 400,000 – 32,000 = $403,000
57. Shively Mfg. Co. sold for $18,000 equipment that cost $40,000 and had a book value of $30,000. Shively would report:
a. Operating cash inflows of $18,000.
b. Operating cash inflows of $8,000.
c. Financing cash inflows of $18,000.
d. Investing cash inflows of $18,000.
Answer: d
Level of Learning: 2 Medium
Learning Objective: 04-08
Topic Area: Statement of cash flows – Classifying cash flows
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
58. Arrow Printers paid $2,000 interest on short-term notes payable, $10,000 interest on long-term bonds, and $6,000 in dividends on its common stock. Arrow would report cash outflows from activities, as follows:
a. Operating, $2,000; financing, $16,000.
b. Operating, $0; financing, $18,000.
c. Operating, $12,000; financing, $6,000.
d. Operating, $18,000; financing, $0.
Answer: c
Level of Learning: 2 Medium
Learning Objective: 04-08
Topic Area: Statement of cash flows – Classifying cash flows
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
59. Hong Kong Clothiers reported revenue of $5,000,000 for its year ended December 31, 2016. Accounts receivable at December 31, 2015 and 2016, were $320,000 and $355,000, respectively. Using the direct method for reporting cash flows from operating activities, Hong Kong Clothiers would report cash collected from customers of:
a. $4,965,000.
b. $5,000,000.
c. $5,035,000.
d. $5,045,000.
Answer: a
Level of Learning: 3 Hard
Learning Objective: 04-08
Topic Area: Statement of cash flows – Direct method
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
|
Accounts Receivable |
|
|
12/31/15 320,000 |
|
|
Sales 5,000,000 |
? |
|
355,000 |
|
Cash collections = $320,000 + 5,000,000 – 355,000 = $4,965,000
60. Lucia Ltd. reported net income of $135,000 for the year ended December 31, 2016. January 1 balances in accounts receivable and accounts payable were $29,000 and $26,000, respectively. Year-end balances in these accounts were $30,000 and $24,000, respectively. Assuming that all relevant information has been presented, Lucia's cash flows from operating activities would be:
a. $132,000.
b. $134,000.
c. $136,000.
d. $138,000.
Answer: a
Level of Learning: 3 Hard
Learning Objective: 04-08
Topic Area: Statement of cash flows – Indirect method
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
|
Net income |
135,000 |
|
Subtract increase in A/R |
(1,000) |
|
Subtract decrease in A/P |
(2,000) |
|
Cash flows from operating activities |
$132,000 |
|
|
|
61. Shady Lane's income tax payable account decreased from $14 million to $12 million during 2016. If its income tax expense was $80 million, what was shown as an operating cash flow under the direct method?
a. A cash outflow of $12 million.
b. A cash outflow of $78 million.
c. A cash outflow of $80 million.
d. A cash outflow of $82 million.
Answer: d
Level of Learning: 3 Hard
Learning Objective: 04-08
Topic Area: Statement of cash flows – Direct method
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback: Income taxes payable: $14 million + 80 million – x = $12 million. x = $82 million.
62. Bird Brain Co. reported net income of $45,000 for the year ended December 31, 2016. January 1 balances in accounts receivable and accounts payable were $23,000 and $26,000 respectively. Year-end balances in these accounts were $22,000 and $28,000, respectively. Assuming that all relevant information has been presented, Bird Brain's cash flows from operating activities would be:
a. $48,000.
b. $44,000.
c. $46,000.
d. $45,000.
Answer: a
Level of Learning: 3 Hard
Learning Objective: 04-08
Topic Area: Statement of cash flows – Indirect method
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
|
Net income |
$45,000 |
|
Add decrease in A/R |
1,000 |
|
Add increase in A/P |
2,000 |
|
Cash flows from operating activities |
$48,000 |
|
|
|
63. Nevada Boot Co. reported net income of $216,000 for its year ended December 31, 2016. Purchases totaled $152,000. Accounts payable balances at the beginning and end of the year were $36,000 and $33,000, respectively. Beginning and ending inventory balances were $44,000 and $46,000, respectively. Assuming that all relevant information has been presented, Nevada Boot would report operating cash flows of:
a. $155,000.
b. $221,000.
c. $211,000.
d. $151,000.
Answer: c
Level of Learning: 3 Hard
Learning Objective: 04-08
Topic Area: Statement of cash flows – Indirect method
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
|
Net income |
$216,000 |
|
|
Deduct increase in Inventory |
(2,000 |
) |
|
Deduct decrease in A/P |
(3,000 |
) |
|
Cash flows from operating activities |
$211,000 |
|
Use the following to answer questions 64–66:
Rowdy's Restaurants Cash Flow (in millions)
|
Cash received from: |
|
|
Customers |
$ 1,800 |
|
Interest on investments |
200 |
|
Sale of land |
100 |
|
Sale of Rowdy’s capital stock |
600 |
|
Issuance of debt securities |
2,000 |
|
|
|
|
Cash paid for: |
|
|
Interest on debt |
$ 300 |
|
Income tax |
80 |
|
Debt principal reduction |
1,500 |
|
Purchase of equipment |
4,000 |
|
Purchase of inventory |
1,000 |
|
Dividends on capital stock |
200 |
|
Operating expenses |
500 |
64. Rowdy's would report net cash inflows (outflows) from operating activities in the amount of:
a. $(80).
b. $120.
c. $200.
d. $420.
Answer: b
Level of Learning: 3 Hard
Learning Objective: 04-08
Topic Area: Statement of cash flows – Direct method
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
|
Customers |
$1,800 |
|
|
Interest on investments |
200 |
|
|
Interest on debt |
(300 |
) |
|
Income tax |
(80 |
) |
|
Purchase of inventory |
(1,000 |
) |
|
Operating expenses |
(500 |
) |
|
Cash inflows from operating activities |
$ 120 |
|
|
|
|
|
65. Rowdy's would report net cash inflows (outflows) from investing activities in the amount of:
a. $(4,000).
b. $ 100.
c. $(3,900).
d. $(1,900).
Answer: c
Level of Learning: 3 Hard
Learning Objective: 04-08
Topic Area: Statement of cash flows – Classifying cash flows
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
|
Sale of land |
$ 100 |
|
|
Purchase of equipment |
(4,000 |
) |
|
Cash outflows from investing activities |
$(3,900 |
) |
|
|
|
|
66. Rowdy's would report net cash inflows (outflows) from financing activities in the amount of:
a. $ 1,100.
b. $(1,100).
c. $ 820.
d. $ 900.
Answer: d
Level of Learning: 3 Hard
Learning Objective: 04-08
Topic Area: Statement of cash flows – Classifying cash flows
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback:
|
Sale of common stock |
$ 600 |
|
|
Issuance of debt securities |
2,000 |
|
|
Debt principal reduction |
(1,500 |
) |
|
Dividends on common stock |
(200 |
) |
|
Cash inflows from financing activities |
$ 900 |
|
|
|
|
|
67. Expenses in an income statement prepared under International Financial Reporting Standards:
a. Must be classified by function.
b. Must be classified by natural description.
c. Can be classified either by function or by natural description.
d. None of the other answers is correct.
Answer: c
Level of Learning: 1 Easy
Learning Objective: 04-01
Learning Objective: 04-09
Topic Area: IFRS – Income statement
Blooms: Remember
AACSB: Reflective thinking
AACSB: Diversity
AICPA: BB Global
AICPA: FN Measurement
68. In a statement of cash flows prepared under International Financial Reporting Standards, each of the following items is typically classified as a financing cash flow except:
a. Interest paid.
b. Dividends paid.
c. Proceeds from the issuance of long-term debt.
d. Dividends received.
Answer: d
Level of Learning: 1 Easy
Learning Objective: 04-08
Learning Objective: 04-09
Topic Area: IFRS – Statement of cash flows
Blooms: Understand
AACSB: Reflective thinking
AACSB: Diversity
AICPA: BB Global
AICPA: FN Measurement
69. Jacobsen Corporation prepares its financial statements applying U.S. GAAP. During its 2016 fiscal year, the company reported before-tax income of $620,000. This amount does not include the following two items, both of which are considered to be material in amount:
Unusual gain $200,000
Loss on discontinued operations (300,000)
The company’s income tax rate is 40%. In its 2016 income statement, Jacobsen would report income from continuing operations of:
a. $312,000.
b. $372,000.
c. $492,000.
d. $620,000.
Answer: c
Level of Learning: 3 Hard
Learning Objective: 04-01
Learning Objective: 04-04
Topic Area: Income from continuing operations
Topic Area: Income tax expense
Topic Area: Discontinued operations
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Feedback: $620,000 + 200,000 = $820,000 x (1 – .40) = $492,000. The $200,000 gain is included in income from continuing operations.
70. Jacobsen Corporation prepares its financial statement applying International Financial Reporting Standards. During its 2016 fiscal year, the company reported before-tax income of $620,000. This amount does not include the following two items, both of which are considered to be material in amount:
Unusual gain $200,000
Loss on discontinued operations (300,000)
The company’s income tax rate is 40%. In its 2016 income statement, Jacobsen would report income from continuing operations of:
a. $312,000.
b. $372,000.
c. $492,000.
d. $620,000.
Answer: c
Level of Learning: 3 Hard
Learning Objective: 04-01
Learning Objective: 04-04
Learning Objective: 04-09
Topic Area: Income from continuing operations
Topic Area: Discontinued operations
Topic Area: IFRS – Income statement
Blooms: Apply
AACSB: Knowledge Application
AACSB: BB Global
AACSB: Diversity
AICPA: FN Measurement
Feedback: $620,000 + 200,000 = $820,000 x (1 – .40) = $492,000. The $200,000 gain is included in income from continuing operations.
Matching Pair Questions
71. Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
|
TERM |
PHRASE |
NUMBER |
|
1. Taxable income |
Also known as income tax expense. |
____ |
|
2. Intraperiod tax allocation |
From transactions or events that are not likely to occur in the foreseeable future. |
____ |
|
3. Prior period adjustment |
Associates tax with income statement items. |
____ |
|
4. Provision for income tax |
Used as the base for computing taxes currently payable. |
____ |
|
5. Transitory earnings |
Made to correct a material error. |
____ |
Answer:
|
TERM |
PHRASE |
NUMBER |
|
1. Taxable income |
Also known as income tax expense. |
4 |
|
2. Intraperiod tax allocation |
From transactions or events that are not likely to occur in the foreseeable future. |
5 |
|
3. Prior period adjustment |
Associates tax with income statement items. |
2 |
|
4. Provision for income tax |
Used as the base for computing taxes currently payable. |
1 |
|
5. Transitory earnings |
Made to correct a material error. |
3 |
Level of Learning: 2 Medium
Learning Objective: 04-01
Learning Objective: 04-03
Learning Objective: 04-04
Topic Area: Income tax expense
Topic Area: Earnings quality components
Topic Area: Discontinued Operations
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
72. Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
|
TERM |
PHRASE |
NUMBER |
|
1. Operating activities (income statement) |
Is directly related to the principal revenue-generating activities. |
____ |
|
2. Matching principle |
Requires note disclosure, if material. |
____ |
|
3. Income from continuing operations |
Expenses are recognized in the same period as the related revenues. |
____ |
|
4. Income from discontinued operations |
Income from an identifiable component will cease. |
____ |
|
5. Change in accounting estimate |
More useful to analysts in predicting future income than current net income. |
____ |
Answer:
|
TERM |
PHRASE |
NUMBER |
|
1. Operating activities (income statement) |
Is directly related to the principal revenue-generating activities. |
1 |
|
2. Matching principle |
Requires note disclosure, if material. |
5 |
|
3. Income from continuing operations |
Expenses are recognized in the same period as the related revenues. |
2 |
|
4. Income from discontinued operations |
Income from an identifiable component will cease. |
4 |
|
5. Change in accounting estimate |
More useful to analysts in predicting future income than current net income. |
3 |
Level of Learning: 1 Easy
Learning Objective: 04-01
Learning Objective: 04-04
Learning Objective: 04-08
Topic Area: Income from continuing operations
Topic Area: Accounting changes
Topic Area: Discontinued operations
Topic Area: Statement of cash flows – Classifying cash flows
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
73. Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
|
TERM |
PHRASE |
NUMBER |
|
1. Single-step income statement |
Not directly related to a firm's principal revenue-generating activities. |
____ |
|
2. Financing activities |
Likely to be discontinued within a year. |
____ |
|
3. Held for sale component |
Groups all revenues and gains. |
____ |
|
4. Nonoperating activities (income statement) |
Related to the acquisition and disposition of long-term assets. |
____ |
|
5. Investing activities |
Related to the external financing of the company. |
____ |
Answer:
|
TERM |
PHRASE |
NUMBER |
|
1. Single-step income statement |
Not directly related to a firm's principal revenue-generating activities. |
4 |
|
2. Financing activities |
Likely to be discontinued within a year. |
3 |
|
3. Held for sale component |
Groups all revenues and gains. |
1 |
|
4. Nonoperating activities (income statement) |
Related to the acquisition and disposition of long-term assets. |
5 |
|
5. Investing activities |
Related to the external financing of the company. |
2 |
Level of Learning: 1 Easy
Learning Objective: 04-01
Learning Objective: 04-04
Learning Objective: 04-08
Topic Area: Income statement formats – Single-step format
Topic Area: Discontinued operations
Topic Area: Statement of cash flows – Classifying cash flows
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
74. Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
|
TERM |
PHRASE |
NUMBER |
|
1. Comprehensive income |
Reported in the nonoperating section of the income statement. |
____ |
|
2. Discontinued operations |
Reported net of tax immediately after income from continuing operations. |
____ |
|
3. Gain/loss from sale of investments |
Total nonowner changes in equity for a reporting period. |
____ |
|
4. Multiple-step income statement |
Reports intermediate subtotals in arriving at net income. |
____ |
|
5. Direct method |
Reports the cash effects of each operating activity directly on the statement. |
____ |
Answer:
|
TERM |
PHRASE |
NUMBER |
|
1. Comprehensive income |
Reported in the nonoperating section of the income statement. |
3 |
|
2. Discontinued operations |
Reported net of tax immediately after income from continuing operations. |
2 |
|
3. Gain/loss from sale of investments |
Total nonowner changes in equity for a reporting period. |
1 |
|
4. Multiple-step income statement |
Reports intermediate subtotals in arriving at net income. |
4 |
|
5. Direct method |
Reports the cash effects of each operating activity directly on the statement. |
5 |
Level of Learning: 2 Medium
Learning Objective: 04-01
Learning Objective: 04-04
Learning Objective: 04-06
Learning Objective: 04-08
Topic Area: Income statement formats – Multiple-step format
Topic Area: Discontinued operations
Topic Area: Comprehensive income
Topic Area: Statement of cash flows – Classifying cash flows
Topic Area: Statement of cash flows – Direct method
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
75. Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
|
TERM |
PHRASE |
NUMBER |
|
1. Earnings per share |
Required disclosure for publicly traded corporations. |
____ |
|
2. Indirect method |
If sold or held for sale, reported as a discontinued operation. |
____ |
|
3. Restructuring costs |
Separately stated component of continuing operations. |
____ |
|
4. Earnings quality |
Calculations work backward from net income to cash flow from operating activities. |
____ |
|
5. Component of an entity |
Ability of reported income to predict future earnings. |
____ |
Answer:
|
TERM |
PHRASE |
NUMBER |
|
1. Earnings per share |
Required disclosure for publicly traded corporations. |
1 |
|
2. Indirect method |
If sold or held for sale, reported as a discontinued operation. |
5 |
|
3. Restructuring costs |
Separately stated component of continuing operations. |
3 |
|
4. Earnings quality |
Calculations work backward from net income to cash flow from operating activities. |
2 |
|
5. Component of an entity |
Ability of reported income to predict future earnings. |
4 |
Level of Learning: 2 Medium
Learning Objective: 04-03
Learning Objective: 04-04
Learning Objective: 04-05
Learning Objective: 04-08
Topic Area: Earnings quality management
Topic Area: Restructuring costs
Topic Area: Discontinued operations
Topic Area: Earnings per share
Topic Area: Statement of cash flows – Indirect method
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
76. Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
|
TERM |
PHRASE |
NUMBER |
|
1. Issuance of common stock |
The acquisition of assets by issuing debt or equity securities. |
____ |
|
2. Operating activities (SCF) |
Costs incurred often relate to downsizing. |
____ |
|
3. Restructuring costs |
Total nonowner change in equity for a reporting period. |
____ |
|
4. Noncash financing and investing activities |
Financing activity (SCF). |
____ |
|
5. Comprehensive income |
When grouped together, essentially net income on a cash basis. |
____ |
Answer:
|
TERM |
PHRASE |
NUMBER |
|
|
|
|
|
|
|
1. Issuance of common stock |
The acquisition of assets by issuing debt or equity securities. |
4 |
|
|
2. Operating activities (SCF) |
Costs incurred often relate to downsizing. |
3 |
|
|
3. Restructuring costs |
Total nonowner change in equity for a reporting period. |
5 |
|
|
4. Noncash financing and investing activities |
Financing activity (SCF). |
1 |
|
|
5. Comprehensive income |
When grouped together, essentially net income on a cash basis. |
2 |
|
Level of Learning: 2 Medium
Learning Objective: 04-03
Learning Objective: 04-06
Learning Objective: 04-08
Topic Area: Restructuring costs
Topic Area: Comprehensive income components
Topic Area: Statement of cash flows – Classifying cash flows
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
77. Listed below are 10 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the number for the correct term.
|
TERM |
PHRASE |
NUMBER |
|
1. Earnings per share |
Required disclosure for publicly traded corporations. |
____ |
|
2. Comprehensive income |
Component of the entity has been sold or will be sold. |
____ |
|
3. Restructuring costs |
Costs generally associated with downsizing. |
____ |
|
4. Multiple-step income statement |
Reports a series of intermediate subtotals. |
____ |
|
5. Foreign currency translation gain |
Accounted for prospectively. |
____ |
|
6. Change in estimate |
Tangentially related to normal operations. |
____ |
|
7. Nonoperating income |
Accounted for retrospectively by revising prior years' statements. |
____ |
|
8. Change in accounting principle |
Other comprehensive income item. |
____ |
|
9. Discontinued operations |
Total nonowner change in equity. |
____ |
|
10. Earnings quality |
Ability of reported income to predict future earnings. |
____ |
Answer:
|
TERM |
PHRASE |
NUMBER |
|
1. Earnings per share |
Required disclosure for publicly traded corporations. |
1 |
|
2. Comprehensive income |
Component of the entity has been sold or will be sold. |
9 |
|
3. Restructuring costs |
Costs generally associated with downsizing. |
3 |
|
4. Multiple-step income statement |
Reports a series of intermediate subtotals. |
4 |
|
5. Foreign currency translation gain |
Accounted for prospectively. |
6 |
|
6. Change in estimate |
Tangentially related to normal operations. |
7 |
|
7. Nonoperating income |
Accounted for retrospectively by revising prior years' statements. |
8 |
|
8. Change in accounting principle |
Other comprehensive income item. |
5 |
|
9. Discontinued operations |
Total nonowner change in equity. |
2 |
|
10. Earnings quality |
Ability of reported income to predict future earnings. |
10 |
Level of Learning: 2 Medium
Learning Objective: 04-01
Learning Objective: 04-02
Learning Objective: 04-03
Learning Objective: 04-04
Learning Objective: 04-06
Topic Area: Income statement – Multiple-step format
Topic Area: Income from continuing operations
Topic Area: Accounting changes
Topic Area: Operating versus nonoperating income
Topic Area: Restructuring costs
Topic Area: Discontinued operations
Topic Area: Comprehensive income
Topic Area: Statement of cash flows – Classifying cash flows
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Problems
Use the following to answer questions 78–80:
On September 1, 2016, Jacob Furniture Mart enters into a tentative agreement to sell the assets of its office equipment division. This division qualifies as a component of the entity according to GAAP regarding discontinued operations. The division's contribution to Jacob's operating income for 2016 was a $3 million loss before taxes. Jacob has an average tax rate of 30%.
Required: Consider independently the appropriate accounting by Jacob under the three scenarios below.
78. Scenario 1: Assume that Jacob sold the division's assets on December 31, 2016, for $24 million. The book value of the division's assets was $19 million at that date. Under these assumptions, what would Jacob report in its 2016 income statement regarding the office equipment division? Explain where this information would be presented.
Answer: Scenario 1: Jacob would report $1.4 million ($3,000,000 – $5,000,000 gain = $2,000,000. $2,000,000 net of $600,000 in taxes = $1,400,000) as income from discontinued operations. This income would be reported as a separate item between income from continuing operations and net income in Jacob's income statement.
Learning Objective: 04-04
Level of Learning: 3 Hard
Topic Area: Discontinued operations
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
79. Scenario 2: Assume that Jacob had not yet sold the division's assets by the end of 2016. Further, assume that the fair value less costs to sell of the division's assets at December 31, 2016, was $24 million and was expected to remain the same when the assets are sold in 2017. The book value of the division's assets was $19 million at the end of the year. Under these assumptions, what would Jacob report in its 2016 income statement regarding the office equipment division? Explain where this information would be presented.
Answer: Scenario 2: Jacob would report $2.1 million loss ($3,000,000 operating loss net of $900,000 in tax benefit) from discontinued operations. This loss would be reported as a separate item between income from continuing operations and net income in Jacob's income statement. The gain on sale of the division's assets would not be recorded until realized in 2017.
Level of Learning: 3 Hard
Learning Objective: 04-04
Topic Area: Discontinued operations
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
80. Scenario 3: Assume that Jacob had not yet sold the office furniture division by the end of 2016. Further, assume that the fair value less costs to sell of the division's assets at December 31, 2016, was $12 million and was expected to remain the same when the assets are sold in 2017. The book value of the division's assets was $19 million at the end of the year. Under these assumptions, what would Jacob report in its 2016 income statement regarding the office equipment division? Explain where this information would be presented.
Answer: Scenario 3: Jacob would report a $7.0 million loss ($3,000,000 operating loss + $7,000,000 impairment loss = $10,000,000. $10,000,000 net of $3.0 million in tax benefit = $7,000,000) from discontinued operations. The loss represents the total of the predisposal loss from operating the division ($3 million) and the impairment of the division's assets ($7 million) that will be sold in 2017. This $7.0 million net-of-tax loss ($10 million x [1 – .30]) would be reported as a separate item between income from continuing operations and net income in Jacob's income statement.
Level of Learning: 3 Hard
Learning Objective: 04-04
Topic Area: Discontinued operations
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
81. The Filzinger Corporation’s December 31, 2016 year-end trial balance contained the following income statement items:
|
Account Title |
Debits |
Credits |
|
Sales revenue |
|
6,700,000 |
|
Interest revenue |
|
70,000 |
|
Gain on sale of investments |
|
52,000 |
|
Cost of goods sold |
4,200,000 |
|
|
Selling expenses |
350,000 |
|
|
General and administrative expenses |
948,000 |
|
|
Interest expense |
30,000 |
|
|
Research and development expense |
600,000 |
|
|
Restructuring costs |
330,000 |
|
|
Income tax expense |
145,000 |
|
Required: Calculate the company’s operating income for the year using a single-step income statement format.
Answer:
Sales revenue $6,700,000
Less operating
expenses:
Cost
of goods sold $4,200,000
Selling
expenses 350,000
General
and administrative expenses 948,000
Research and development expenses 600,000
Restructuring costs 330,000 6,428,000
Operating income $ 272,000
Level of Learning: 2 Medium
Learning Objective: 04-01
Learning Objective: 04-03
Topic Area: Income statement – Single-step format
Topic Area: Operating versus nonoperating income
Topic Area: Earnings quality components
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
82. Canton Corporation reported the following items in its adjusted trial balance for the year ended December 31, 2016:
|
Income from continuing operations before income taxes |
$110,000 |
|
|
Gain on disposal of discontinued component |
28,000 |
|
|
Loss from operations of discontinued component |
(50,000 |
) |
Canton is subject to a 30% tax rate.
Required: Prepare the December 31, 2016, income statement for Canton Corporation, starting with income from continuing operations before income taxes.
Answer:
|
Canton Corporation Partial Income Statement For the Year Ended December 31, 2016
|
||
|
Income from continuing operations before income taxes |
|
$110,000 |
|
Income tax expense |
|
33,000 |
|
Income from continuing operations |
|
77,000 |
|
Discontinued operations: |
|
|
|
Loss from operations of discontinued component |
|
|
|
(including gain on disposal of $28,000) |
$(22,000) |
|
|
Income tax benefit |
6,600 |
|
|
Loss on discontinued operations |
|
(15,400) |
|
Net income |
|
$ 61,600 |
|
|
|
|
Level of Learning: 3 Hard
Learning Objective: 04-04
Topic Area: Income statement
Topic Area: Income tax expense
Topic Area: Discontinued operations
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Use the following to answer questions 83 and 84:
|
Plano Co. 12/31/16 |
Debits |
Credits |
|
Partial Trial Balance Data |
|
|
|
|
|
|
|
Sales revenue |
|
700,000 |
|
Interest revenue |
|
60,000 |
|
Gain on sale of investments |
|
110,000 |
|
Cost of goods sold |
500,000 |
|
|
Selling expenses |
150,000 |
|
|
Restructuring costs |
40,000 |
|
|
Interest expense |
30,000 |
|
|
General and administrative expenses |
60,000 |
|
Plano had 50,000 shares of stock outstanding throughout the year. Income tax expense has not yet been accrued. The effective tax rate is 30%.
83. Required: Prepare a single-step income statement with earnings per share disclosure.
Answer:
|
Plano Co. Income Statement For the Year Ended December 31, 2016
|
||
|
Revenues and gains: |
|
|
|
Sales revenue |
|
$700,000 |
|
Gain on sale of investments |
|
110,000 |
|
Interest revenue |
|
60,000 |
|
Total revenues and gains |
|
870,000 |
|
Expenses: |
|
|
|
Cost of goods sold |
$500,000 |
|
|
Selling |
150,000 |
|
|
General and administrative |
60,000 |
|
|
Restructuring costs |
40,000 |
|
|
Interest expense |
30,000 |
|
|
Total expenses |
|
780,000 |
|
Income before income taxes |
|
90,000 |
|
Income tax expense |
|
27,000 |
|
Net income |
|
$ 63,000 |
|
|
|
|
|
Earnings per share |
|
$1.26 |
|
|
|
|
Level of Learning: 3 Hard
Learning Objective: 04-01
Learning Objective: 04-03
Learning Objective: 04-05
Topic Area: Income statement – Single-step format
Topic Area: Income tax expense
Topic Area: Restructuring costs
Topic Area: Earnings per share
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
84. Required: Prepare a multiple-step income statement with earnings per share disclosure.
Answer:
|
Plano Co. Income Statement For the Year Ended December 31, 2016
|
|
||
|
Sales revenue |
|
$700,000 |
|
|
Cost of goods sold |
|
500,000 |
|
|
Gross profit |
|
200,000 |
|
|
Operating expenses: |
|
|
|
|
Selling |
$150,000 |
|
|
|
General and administrative |
60,000 |
|
|
|
Restructuring costs |
40,000 |
|
|
|
Total operating expenses |
|
250,000 |
|
|
Operating income (loss) |
|
(50,000) |
|
|
Other income (expense): |
|
|
|
|
Gain on sale of investments |
110,000 |
|
|
|
Interest revenue |
60,000 |
|
|
|
Interest expense |
(30,000 |
) |
|
|
Total income, net |
|
140,000 |
|
|
Income before income taxes |
|
90,000 |
|
|
Income tax expense |
|
27,000 |
|
|
Net income |
|
$ 63,000 |
|
|
|
|
|
|
|
Earnings per share |
|
$1.26 |
|
|
|
|
|
|
Level of Learning: 3 Hard
Learning Objective: 04-01
Learning Objective: 04-03
Learning Objective: 04-05
Topic Area: Income statement – Multiple-step format
Topic Area: Income tax expense
Topic Area: Restructuring costs
Topic Area: Earnings per share
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Use the following to answer questions 85–87:
The trial balance of Kroeger Inc. included the following accounts as of December 31, 2016:
|
|
Debits |
Credits |
|
Sales revenue |
|
8,200,000 |
|
Interest revenue |
|
60,000 |
|
Gain on sale of investments |
|
120,000 |
|
Unrealized gains on investments |
|
140,000 |
|
Foreign currency translation losses |
160,000 |
|
|
Cost of goods sold |
6,100,000 |
|
|
Selling expenses |
600,000 |
|
|
Goodwill impairment loss |
500,000 |
|
|
Interest expense |
30,000 |
|
|
General and administrative expenses |
500,000 |
|
Kroeger had 300,000 shares of stock outstanding throughout the year. Income tax expense has not yet been accrued. The effective tax rate is 40%.
85. Required: Prepare a 2016 multiple-step income statement for Kroeger Inc. with earnings per share disclosure.
Answer:
|
Kroeger Inc. Income Statement For the Year Ended December 31, 2016
|
||||
|
Sales revenue |
|
|
$8,200,000 |
|
|
Cost of goods sold |
|
|
6,100,000 |
|
|
Gross profit |
|
|
2,100,000 |
|
|
Operating expenses: |
|
|
|
|
|
Selling |
$600,000 |
|
|
|
|
General and administrative |
500,000 |
|
|
|
|
Goodwill impairment loss |
500,000 |
|
|
|
|
Total operating expenses |
|
|
1,600,000 |
|
|
Operating income |
|
|
500,000 |
|
|
Other income (expense): |
|
|
|
|
|
Gain on sale of investments |
120,000 |
|
|
|
|
Interest revenue |
60,000 |
|
|
|
|
Interest expense |
(30,000 |
) |
|
|
|
Total other income, net |
|
|
150,000 |
|
|
Income before income taxes |
|
|
650,000 |
|
|
Income tax expense |
|
|
260,000 |
|
|
Net income |
|
|
$ 390,000 |
|
|
|
|
|
|
|
|
Earnings per share |
|
|
$1.30 |
|
|
|
|
|
|
|
Level of Learning: 3 Hard
Learning Objective: 04-01
Learning Objective: 04-03
Learning Objective: 04-05
Topic Area: Income statement – Multiple-step format
Topic Area: Income tax expense
Topic Area: Earnings quality components
Topic Area: Earnings per share
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
86. Required: Prepare a 2016 separate statement of comprehensive income for Kroeger Inc.
Answer:
|
Kroeger Inc. Statement of Comprehensive Income For the Year Ended December 31, 2016
|
||||
|
Net income |
|
|
$390,000 |
|
|
Other comprehensive income: |
|
|
|
|
|
Unrealized gains on investments, net of tax |
84,000 |
|
|
|
|
Foreign currency translation losses, net of tax |
(96,000 |
) |
|
|
|
Total other comprehensive loss |
|
|
(12,000 |
) |
|
Comprehensive income |
|
|
$378,000 |
|
Level of Learning: 3 Hard
Learning Objective: 04-06
Topic Area: Comprehensive income presentation
Topic Area: Comprehensive income components
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
87. Required: Prepare a 2016 single, continuous statement of comprehensive income for Kroeger Inc. Use a multiple-step income statement format.
Answer:
|
Kroeger Inc. Statement of Comprehensive Income For the Year Ended December 31, 2016
|
||||
|
Sales revenue |
|
|
$8,200,000 |
|
|
Cost of goods sold |
|
|
6,100,000 |
|
|
Gross profit |
|
|
2,100,000 |
|
|
Operating expenses: |
|
|
|
|
|
Selling |
$600,000 |
|
|
|
|
General and administrative |
500,000 |
|
|
|
|
Goodwill impairment loss |
500,000 |
|
|
|
|
Total operating expenses |
|
|
1,600,000 |
|
|
Operating income |
|
|
500,000 |
|
|
Other income (expense): |
|
|
|
|
|
Gain on sale of investments |
120,000 |
|
|
|
|
Interest revenue |
60,000 |
|
|
|
|
Interest expense |
(30,000 |
) |
|
|
|
Total other income, net |
|
|
150,000 |
|
|
Income before income taxes |
|
|
650,000 |
|
|
Income tax expense |
|
|
260,000 |
|
|
Net income |
|
|
390,000 |
|
|
Other comprehensive income: |
|
|
|
|
|
Unrealized gains on investments, net of tax |
84,000 |
|
|
|
|
Foreign currency translation losses, net of tax |
(96,000 |
) |
|
|
|
Total other comprehensive loss |
|
|
(12,000 |
|
|
Comprehensive income |
|
|
$378,000 |
|
|
|
|
|
|
|
|
Earnings per share |
|
|
$1.30 |
|
|
|
|
|
|
|
Level of Learning: 3 Hard
Learning Objective: 04-01
Learning Objective: 04-03
Learning Objective: 04-05
Learning Objective: 04-06
Topic Area: Income statement – Multiple-step format
Topic Area: Income tax expense
Topic Area: Earnings quality components
Topic Area: Earnings per share
Topic Area: Comprehensive income presentation
Topic Area: Comprehensive income components
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
88. The following income statement items appeared on the adjusted trial balance of Foxworthy Corporation for the year ended December 31, 2016 ($ in 000s): sales revenue, $22,300; cost of goods sold, $14,500; selling expenses, $2,300; general and administrative expenses, $1,200; dividend revenue from investments, $200; interest expense, $300. Income taxes have not yet been accrued. The company’s income tax rate is 40% on all items of income or loss. These revenue and expense items appear in the company’s income statement every year. The company’s controller, however, has asked for your help in determining the appropriate treatment of the following nonrecurring transactions that also occurred during 2016 ($ in 000s). All transactions are material in amount.
1. Investments were sold during the year at a loss of $300. Foxworthy also had unrealized losses of $200 for the year on investments.
2. One of the company’s factories was closed during the year. Restructuring costs incurred were $2,000.
3. During the year, Foxworthy completed the sale of one of its operating divisions that qualifies as a component of the entity according to GAAP regarding discontinued operations. The division had incurred operating income of $800 in 2016 prior to the sale, and its assets were sold at a loss of $1,800.
4. Foreign currency translation gains for the year totaled $600.
Required:
Prepare Foxworthy’s single, continuous statement of comprehensive income for 2016, including earnings per share disclosures. Use a multiple-step income statement format. Two million shares of common stock were outstanding throughout the year.
Answer:
|
|
|
|
||
Foxworthy Manufacturing Corporation |
||||
|
Statement of Comprehensive Income |
||||
|
For the Year Ended December 31, 2016 |
||||
|
($ in 000s) |
||||
|
|
|
|
||
|
Sales revenue .................................................................... |
|
$22,300 |
||
|
Cost of goods sold ............................................................. |
|
14,500 |
||
|
Gross profit ...................................................................... |
|
7,800 |
||
|
Operating expenses: |
|
|
||
|
Selling ........................................................................... |
$2,300 |
|
||
|
General and administrative ............................................. |
1,200 |
|
||
|
Restructuring costs ......................................................... |
2,000 |
|
||
|
Total operating expenses ............................................ |
|
5,500 |
||
|
Operating income .............................................................. |
|
2,300 |
||
|
Other income (expense): |
|
|
||
|
Loss on sales of investments .......................................................................................... |
(300) |
|
||
|
Interest expense .......................................................................................... |
(300) |
|
||
|
Dividend revenue .......................................................................................... |
200 |
|
||
|
Other income (expense) .......................................................................................... |
|
(400) |
||
|
Income from continuing operations before income taxes .......................................................................................... |
|
1,900 |
||
|
Income tax expense |
|
760 |
||
|
Income from continuing operations .................................... |
|
1,140 |
||
|
Discontinued operations: |
|
|
||
|
Income from operations of discontinued component |
|
|
||
|
(including loss on disposal of $1,800) ............................ |
(1,000) |
|
||
|
Income tax benefit .......................................................... |
400 |
|
||
|
Loss from discontinued operations .................................. |
|
(600) |
||
|
Net income ....................................................................... |
|
540 |
||
|
Other comprehensive income: |
|
|
||
|
Unrealized loss from investments, net of $80 tax |
(120) |
|
||
|
Gain from foreign currency translation , net of $240 tax |
360 |
240 |
||
|
Comprehensive income |
|
$ 780 |
||
|
|
|
|
||
|
Earnings per share: |
|
|
||
|
Income from continuing operations |
|
$0.57 |
||
|
Discontinued operations |
|
(0.30) |
||
|
Net income |
|
$0.27 |
||
Level of Learning: 3 Hard
Learning Objective: 04-01
Learning Objective: 04-03
Learning Objective: 04-04
Learning Objective: 04-05
Learning Objective: 04-06
Topic Area: Income statement – Multiple-step format
Topic Area: Income from continuing operations
Topic Area: Operating versus nonoperating income
Topic Area: Income tax expense
Topic Area: Restructuring costs
Topic Area: Discontinued operations
Topic Area: Earnings per share
Topic Area: Comprehensive income presentation
Topic Area: Comprehensive income components
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Use the following to answer questions 89 and 90:
The trial balance of Lakewood Inc. included the following accounts as of December 31, 2016:
|
|
Debits |
Credits |
|
Sales revenue |
|
1,800,000 |
|
Interest revenue |
|
80,000 |
|
Gain on sale of investments |
|
50,000 |
|
Cost of goods sold |
1,100,000 |
|
|
Selling expenses |
220,000 |
|
|
Write-off of obsolete equipment |
30,000 |
|
|
Restructuring costs |
150,000 |
|
|
Interest expense |
40,000 |
|
|
General and administrative expenses |
50,000 |
|
Lakewood Inc. had 100,000 shares of stock outstanding throughout the year. Income tax expense has not yet been accrued. The effective tax rate is 30%.
89. Required: Prepare a single-step income statement with earnings per share disclosure.
Answer:
|
Lakewood Inc. Income Statement For the Year Ended December 31, 2016
|
|||
|
Revenues and gains: |
|
|
|
|
Sales revenue |
|
$1,800,000 |
|
|
Gain on sale of investments |
|
50,000 |
|
|
Interest revenue |
|
80,000 |
|
|
Total revenues and gains |
|
1,930,000 |
|
|
Expenses: |
|
|
|
|
Cost of goods sold |
$1,100,000 |
|
|
|
Selling |
220,000 |
|
|
|
General and administrative |
50,000 |
|
|
|
Restructuring costs |
150,000 |
|
|
|
Interest expense |
40,000 |
|
|
|
Write-off of obsolete equipment |
30,000 |
|
|
|
Total expenses |
|
1,590,000 |
|
|
Income before income taxes |
|
340,000 |
|
|
Income tax expense |
|
102,000 |
|
|
Net income |
|
238,000 |
|
|
|
|
|
|
|
Earnings per share: |
|
$2.38 |
|
|
|
|
|
|
Level of Learning: 3 Hard
Learning Objective: 04-01
Learning Objective: 04-03
Learning Objective: 04-05
Topic Area: Income statement – Single-step format
Topic Area: Income tax expense
Topic Area: Restructuring costs
Topic Area: Earnings quality components
Topic Area: Earnings per share
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
90. Required: Prepare a multiple-step income statement with earnings per share disclosure.
Answer:
|
Lakewood Inc. Income Statement For the Year Ended December 31, 2016
|
||||
|
Sales revenue |
|
|
$1,800,000 |
|
|
Cost of goods sold |
|
|
1,100,000 |
|
|
Gross profit |
|
|
700,000 |
|
|
Operating expenses: |
|
|
|
|
|
Selling |
$220,000 |
|
|
|
|
General and administrative |
50,000 |
|
|
|
|
Restructuring costs |
150,000 |
|
|
|
|
Write-off of obsolete equipment |
30,000 |
|
|
|
|
Total operating expenses |
|
|
450,000 |
|
|
Operating income |
|
|
250,000 |
|
|
Other income (expense): |
|
|
|
|
|
Gain on sale of investments |
50,000 |
|
|
|
|
Interest revenue |
80,000 |
|
|
|
|
Interest expense |
(40,000 |
) |
|
|
|
Total other income, net |
|
|
90,000 |
|
|
Income before income taxes |
|
|
340,000 |
|
|
Income tax expense |
|
|
102,000 |
|
|
Net income |
|
|
238,000 |
|
|
|
|
|
|
|
|
Earnings per share |
|
|
$2.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Level of Learning: 3 Hard
Learning Objective: 04-01
Learning Objective: 04-03
Learning Objective: 04-05
Topic Area: Income statement – Multiple-step format
Topic Area: Operating versus nonoperating income
Topic Area: Income tax expense
Topic Area: Restructuring costs
Topic Area: Earnings quality components
Topic Area: Earnings per share
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
Use the following to answer questions 91–93:
The trial balance of Rollins Inc. included the following accounts as of December 31, 2016:
|
|
Debits |
Credits |
|
Sales revenue |
|
5,900,000 |
|
Interest revenue |
|
40,000 |
|
Loss on sale of investments |
10,000 |
|
|
Unrealized losses on investments |
150,000 |
|
|
Foreign currency translation gains |
|
260,000 |
|
Cost of goods sold |
4,400,000 |
|
|
Selling expenses |
400,000 |
|
|
Restructuring costs |
180,000 |
|
|
Interest expense |
20,000 |
|
|
General and administrative expenses |
300,000 |
|
Rollins had 100,000 shares of stock outstanding throughout the year. Income tax expense has not yet been accrued. The effective tax rate is 40%.
91. Required: Prepare a 2016 multiple-step income statement for Rollins Inc. with earnings per share disclosure.
Answer:
|
Rollins Inc. Income Statement For the Year Ended December 31, 2016
|
||||
|
Sales revenue |
|
|
$5,900,000 |
|
|
Cost of goods sold |
|
|
4,400,000 |
|
|
Gross profit |
|
|
1,500,000 |
|
|
Operating expenses: |
|
|
|
|
|
Selling |
$400,000 |
|
|
|
|
General and administrative |
300,000 |
|
|
|
|
Restructuring costs |
180,000 |
|
|
|
|
Total operating expenses |
|
|
880,000 |
|
|
Operating income |
|
|
620,000 |
|
|
Other income (expense): |
|
|
|
|
|
Loss on sale of investments |
(10,000 |
) |
|
|
|
Interest revenue |
40,000 |
|
|
|
|
Interest expense |
(20,000 |
) |
|
|
|
Total other income, net |
|
|
10,000 |
|
|
Income before income taxes |
|
|
630,000 |
|
|
Income tax expense |
|
|
252,000 |
|
|
Net income |
|
|
$ 378,000 |
|
|
|
|
|
|
|
|
Earnings per share |
|
|
$3.78 |
|
|
|
|
|
|
|
Level of Learning: 3 Hard
Learning Objective: 04-01
Learning Objective: 04-03
Learning Objective: 04-05
Topic Area: Income statement – Multiple-step format
Topic Area: Operating versus nonoperating income
Topic Area: Income tax expense
Topic Area: Restructuring costs
Topic Area: Earnings per share
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
92. Required: Prepare a 2016 separate statement of comprehensive income for Rollins Inc.
Answer:
|
Rollins Inc. Statement of Comprehensive Income For the Year Ended December 31, 2016
|
||||
|
Net income |
|
|
$378,000 |
|
|
Other comprehensive income: |
|
|
|
|
|
Unrealized losses on investments, net of tax |
(90,000) |
|
|
|
|
Foreign currency translation gains, net of tax |
156,000 |
|
|
|
|
Total other comprehensive income |
|
|
66,000 |
|
|
Comprehensive income |
|
|
$444,000 |
|
Level of Learning: 3 Hard
Learning Objective: 04-06
Topic Area: Comprehensive income presentation
Topic Area: Comprehensive income components
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
93. Required: Prepare a 2016 single, continuous statement of comprehensive income for Rollins Inc. Use a multiple-step income statement format.
Answer:
|
Rollins Inc. Statement of Comprehensive Income For the Year Ended December 31, 2016
|
||||
|
Sales revenue |
|
|
$5,900,000 |
|
|
Cost of goods sold |
|
|
4,400,000 |
|
|
Gross profit |
|
|
1,500,000 |
|
|
Operating expenses: |
|
|
|
|
|
Selling |
$400,000 |
|
|
|
|
General and administrative |
300,000 |
|
|
|
|
Restructuring costs |
180,000 |
|
|
|
|
Total operating expenses |
|
|
880,000 |
|
|
Operating income |
|
|
620,000 |
|
|
Other income (expense): |
|
|
|
|
|
Loss on sale of investments |
(10,000 |
) |
|
|
|
Interest revenue |
40,000 |
|
|
|
|
Interest expense |
(20,000 |
) |
|
|
|
Total other income, net |
|
|
10,000 |
|
|
Income before income taxes |
|
|
630,000 |
|
|
Income tax expense |
|
|
252,000 |
|
|
Net income |
|
|
$ 378,000 |
|
|
Other comprehensive income: |
|
|
|
|
|
Unrealized losses on investments, net of tax |
(90,000) |
|
|
|
|
Foreign currency translation gains, net of tax |
156,000 |
|
|
|
|
Total other comprehensive income |
|
|
66,000 |
|
|
Comprehensive income |
|
|
$444,000 |
|
|
|
|
|
|
|
|
Earnings per share |
|
|
$3.78 |
|
|
|
|
|
|
|
Level of Learning: 3 Hard
Learning Objective: 04-01
Learning Objective: 04-03
Learning Objective: 04-05
Learning Objective: 04-06
Topic Area: Income statement – Multiple-step format
Topic Area: Operating versus nonoperating income
Topic Area: Income tax expense
Topic Area: Restructuring costs
Topic Area: Earnings per share
Topic Area: Comprehensive income presentation
Topic Area: Comprehensive income components
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
94. Calstone, Inc., prepares a single, continuous statement of comprehensive income. The following situations occurred during the company’s 2016 fiscal year:
1. Land that had been held as an investment was sold and a gain was recognized.
2. Losses from foreign currency translation were recognized.
3. Interest revenue was recognized.
4. A division was sold that qualifies as a separate component according to GAAP regarding discontinued operations.
5. Unrealized losses on investments.
6. Restructuring costs were incurred due to downsizing and reorganization of a manufacturing facility.
Required:
For each situation, identify the appropriate reporting treatment from the list below (consider each event to be material).
a. As a component of operating income.
b. As a nonoperating income item (other income or expense).
c. As a discontinued operation.
d. As an item of other comprehensive income.
Answer:
1. b. As a nonoperating income item.
2. d. As an item of other comprehensive income item.
3. b. As a nonoperating income item.
4. c. As a discontinued operation.
5. d. As an item of other comprehensive income item.
6. a. As a component of operating income.
Level of Learning: 2 Medium
Learning Objective: 04-01
Learning Objective: 04-03
Learning Objective: 04-04
Learning Objective: 04-06
Topic Area: Operating versus nonoperating income
Topic Area: Discontinued operations
Topic Area: Comprehensive income components
Blooms: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
95. The following information is for Redwood Inc. for the year ended December 31, 2016. Redwood had a cash and cash equivalents balance of $5,200 on January 1, 2016.
|
Cash received from: |
|
|
Customers |
$ 1,900 |
|
Interest on investments |
200 |
|
Sale of land |
100 |
|
Sale of common stock |
600 |
|
Issuance of debt securities |
2,000 |
|
|
|
|
Cash paid for: |
|
|
Interest on debt |
$ 300 |
|
Income tax |
80 |
|
Debt principal reduction |
1,500 |
|
Purchase of equipment |
4,100 |
|
Purchase of inventory |
1,000 |
|
Dividends on common stock |
200 |
|
Operating expenses |
500 |
Required: Prepare a statement of cash flows for the year using the direct method for operating activities.
Answer:
|
REDWOOD INC. Statement of Cash Flows For the Year Ended December 31, 2016
|
||||
|
Cash flows from operating activities: |
|
|
|
|
|
Collections from customers |
$ 1,900 |
|
|
|
|
Interest on investments |
200 |
|
|
|
|
Interest on debt |
(300 |
) |
|
|
|
Payment of income tax |
(80 |
) |
|
|
|
Purchase of inventory |
(1,000 |
) |
|
|
|
Payment of operating expenses |
(500 |
) |
|
|
|
Net cash inflows from operating activities |
|
|
$220 |
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
Sale of land |
100 |
|
|
|
|
Purchase of equipment |
(4,100 |
) |
|
|
|
Net cash outflows from investing activities |
|
|
(4,000 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
Issuance of common stock |
600 |
|
|
|
|
Issuance of debt securities |
2,000 |
|
|
|
|
Payment on debt |
(1,500 |
) |
|
|
|
Payment of dividends |
(200 |
) |
|
|
|
Net cash inflows from financing activities |
|
|
900 |
|
|
|
|
|
|
|
|
Net decrease in cash |
|
|
(2,880 |
) |
|
Cash and cash equivalents, January 1 |
|
|
5,200 |
|
|
Cash and cash equivalents, December 31 |
|
|
$ 2,320 |
|
|
|
|
|
|
|
Level of Learning: 3 Hard
Learning Objective: 04-08
Topic Area: Statement of cash flows – Direct method
Topic Area: Statement of cash flows – Classifying cash flows
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
96. The chief accountant for Julius Co. provides you with the company's most recent income statement and comparative balance sheets below. The accountant has asked for your help in preparing part of the company's 2016 statement of cash flows.
|
2016 Income Statement ($ in thousands) |
|
|
|
Sales revenue |
$5,000 |
|
|
Depreciation expense |
280 |
|
|
Selling & administrative expenses |
3,720 4,000 |
|
|
Income before taxes |
1,000 |
|
|
Income tax expense |
300 |
|
|
Net income |
$700 |
|
|
|
|
|
|
Balance Sheet (all $ in thousands) |
12/31/16 |
12/31/15 |
|
Cash |
$800 |
$750 |
|
Accounts receivable |
450 |
365 |
|
Property, plant & equipment |
1,900 |
1,450 |
|
Less: Accumulated depreciation |
( 800) |
(520) |
|
|
$2,350 |
$2,045 |
|
|
|
|
|
Payables for selling & administration expenses |
300 |
325 |
|
Income taxes payable |
180 |
130 |
|
Common stock |
700 |
700 |
|
Retained warnings |
1,170 |
890 |
|
|
$2,350 |
$2,045 |
|
|
|
|
Required:
In the space provided below, determine the cash flow from operating activities for Julius Co., using the direct method.
Answer:
Cash flows from operating activities:
|
Cash collected from customers |
$ 4,915 |
* |
|
Cash paid for selling & administrative costs |
(3,745 |
)** |
|
Cash paid for income taxes |
(250 |
)*** |
|
Cash flows from operating activities |
$920 |
|
*Accounts receivable (beg.) + Sales – Accounts receivable (end.)
$365 + 5,000 – 450 = $4,915
**S & A Payable (beg.) + S & A. expense – S & A payable (end.)
$325 + 3,720 – 300 = $3,745
*** Income taxes payable (beg.) + Income tax expense –Income taxes payable (end.)
$130 + 300 – 180 = $250
Level of Learning: 3 Hard
Learning Objective: 04-08
Topic Area: Statement of cash flows – Direct method
Topic Area: Statement of cash flows – Classifying cash flows
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
97. The accounting records of Rockness Company provided the data below ($ in 000s).
Net income $25,200
Depreciation and amortization expense 3,300
Decrease in accounts receivable 2,000
Increase in inventory 4,500
Increase in prepaid insurance 300
Increase in salaries payable 900
Decrease in interest payable 400
Required:
Prepare a reconciliation of net income to net cash flows from operating activities.
Answer:
Cash flows from operating activities:
Net income $25,200
Adjustments for noncash effects:
Depreciation and amortization expense 3,300
Changes in operating assets and liabilities:
Decrease in accounts receivable 2,000
Increase in inventory (4,500)
Increase in prepaid insurance (300)
Increase in salaries payable 900
Decrease in interest payable (400)
Net cash flows from operating activities $26,200
Level of Learning: 3 Hard
Learning Objective: 04-08
Topic Area: Statement of cash flows – Indirect method
Blooms: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
98. The statement of cash flows for the year ended December 31, 2016, for Whiteside Incorporated is presented below.
Whiteside Incorporated
Statement of Cash Flows
For the Year Ended December 31, 2016
Cash flows from operating activities:
Collections from customers $420,000
Interest on note receivable 12,000
Dividends received 4,500
Purchase of inventory (156,000)
Payment of operating expenses (83,000)
Payment of interest on debt (16,000)
Net cash flows from operating activities $181,500
Cash flows from investing activities:
Sale of investments 42,000
Purchase of equipment (180,000)
Net cash flows from investing activities (138,000)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 200,000
Purchase of treasury stock (140,000)
Dividends paid (50,000)
Net cash flows from financing activities 10,000
Net increase in cash 53,500
Cash and cash equivalents, January 1 68,900
Cash and cash equivalents, December 31 $122,400
Required:
Prepare the statement of cash flows assuming that Whiteside prepares its financial statements according to International Financial Reporting Standards. Where IFRS allows flexibility, use the classification used most often in IFRS financial statements.
Answer:
Whiteside Incorporated
Statement of Cash Flows
For the Year Ended December 31, 2016
Cash flows from operating activities:
Collections from customers $420,000
Purchase of inventory (156,000)
Payment of operating expenses (83,000)
Net cash flows from operating activities $181,000
Cash flows from investing activities:
Interest on note receivable 12,000
Dividends received 4,500
Sale of investments 42,000
Purchase of equipment (180,000)
Net cash flows from investing activities (121,500)
Cash flows from financing activities:
Payment of interest on debt (16,000)
Proceeds from issuance of long-term debt 200,000
Purchase of treasury stock (140,000)
Dividends paid (50,000)
Net cash flows from financing activities ( 6,000)
Net increase in cash 53,500
Cash and cash equivalents, January 1 68,900
Cash and cash equivalents, December 31 $122,400
Level of Learning: 3 Hard
Learning Objective: 04-08
Learning Objective: 04-09
Topic Area: IFRS –Statement of cash flows
Blooms: Apply
AACSB: Knowledge Application
AACSB: Diversity
AICPA: BB Global
AICPA: FN Measurement
Essay
Instructions:
The following answers to essay questions point out the key phrases that should appear in students' answers. They are not intended to be examples of complete student responses. It would be helpful to provide instructions to students on how brief or in-depth you would like their answers to be.
99. Briefly explain when and why intraperiod tax allocation is necessary.
Answer: Intraperiod tax allocation associates income tax expense with each component of income that causes it. It is required when a discontinued operation is reported.
Level of Learning: 2 Medium
Learning Objective: 04-04
Topic Area: Discontinued operations
Topic Area: Intraperiod tax allocation
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
100. Briefly explain why the income statement is referred to as a change statement.
Answer: The income statement is one of three primary financial statements that is a change statement. That is, it reports on activities over a distinct period that caused some element or elements of financial position to change. Specifically, the income statement reports periodic revenues, gains, expenses, and losses, that is, changes in the retained earnings component of shareholders’ equity. A year is the longest time frame reported. Statements covering periods of less than a year are referred to as interim statements.
Level of Learning: 2 Medium
Learning Objective: 04-01
Topic Area: Income statement
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
101. Net income, often referred to as "the bottom line," is not always a good predictor of future income. Explain this statement.
Answer: Net income is of low quality when items such as discontinued operations or other unusual items are present. Income from continuing operations becomes more important when these items are present. Material items included in continuing operations, such as restructuring charges, may make income from continuing operations fuzzy (in terms of its relation to future profitability) as well.
Level of Learning: 2 Medium
Learning Objective: 04-02
Topic Area: Earnings quality management
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
102. Explain, using an example, how a company can use earnings management and justify it by conservatism.
Answer: To comply with accrual accounting, companies must estimate various items that impact income. For example, the use of allowances for such items such as bad debts and warranties requires professional judgment for estimating appropriate amounts that will affect both the income statement and the balance sheet. These allowances are reviewed each period to make further adjustments to the respective allowance account. If a company was having a very good performance year and anticipated a more difficult year in the future, it might create a larger than usual allowance adjustment (expense) in the current year, justifying it by conservatism, that could lead to taking a smaller adjustment (expense) in a later period. By doing so, current income would be pushed into the future, thereby shifting earnings.
Level of Learning: 3 Hard
Learning Objective: 04-02
Topic Area: Earnings quality management
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
103. In a recent press release, Foot Locker Inc. reported that its fiscal first-quarter net income fell 46% due to losses related to discontinued operations, but earnings from continuing operations jumped 19% amid a modest increase in sales. The specialty athletic retailer said net income was $20 million for the quarter ended May 4, compared with net income of $37 million a year earlier. The latest results included a loss of $18 million from discontinued operations. Last year, the company had earnings of $5 million, or four cents a share, from discontinued operations. Foot Locker said earnings from continuing operations were $38 million, compared with $32 million a year earlier. Discuss how Foot Locker's press release relates to its earnings quality.
Answer: Separating the reported loss on the discontinued component of its operations allows users to assess the permanent (going forward) component of Foot Locker's earnings. By doing so, the reader will note that the company actually improved the performance of the continuing part of its operations, thereby suggesting an upward trend in future earnings. While this may not occur, it is likely to be a better predictor of future earnings than one based on bottom line net income.
Level of Learning: 3 Hard
Learning Objective: 04-02
Learning Objective: 04-04
Topic Area: Earnings quality management
Topic Area: Discontinued operations
Blooms: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
104. In a recent press release, Estee Lauder Co. reported "a fiscal fourth-quarter loss due to a restructuring charge but said it expects to see earnings growth in its fiscal second through fourth quarters." The New York skin care and cosmetics company reported a net loss of $25.4 million, or 13 cents a share, for the quarter ended June 30, compared with net income of $20.4 million, or six cents a share, a year earlier. Excluding the restructuring charge of $76.9 million, or 32 cents a share, the company said profit would have been $51.5 million, or 19 cents a share. Discuss how Estee Lauder's press release relates to its earnings quality.
Answer: Company management is pointing out that, in their opinion, the loss from the restructuring charge is transitory and should not be considered part of permanent earnings. In addition, by taking the charge now, future earnings seem likely to be on an upward trend.
Level of Learning: 2 Medium
Learning Objective: 04-02
Learning Objective: 04-03
Topic Area: Earnings quality management
Topic Area: Earnings quality components
Blooms: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
105. Briefly define discontinued operations and explain how they are reported according to U.S. GAAP.
Answer: A discontinued operation is defined as a component of an entity or a group of components. A component is any part of the company, such as an operating segment or subsidiary, that includes operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the company. A component or group of components that has been sold or disposed of in some other way, or is considered held for sale is reported as a discontinued operation if the disposal represents a strategic shift that has, or will have, a major effect on a company’s operations and financial results. Discontinued operations are reported, net of tax, after income from continuing operations.
Level of Learning: 2 Medium
Learning Objective: 04-04
Topic Area: Discontinued operations
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
106. Presented below is an excerpt ($ in millions) from the 2014 annual report to shareholders of Microsoft Corporation. Explain how the shareholder should interpret the difference between the net income and total comprehensive income for Microsoft in 2014.
|
Comprehensive Income: |
|
|
Net income |
$21,863 |
|
Other comprehensive income (loss), net of |
|
|
Net unrealized gains (losses) on derivatives |
(26) |
|
Foreign currency translation |
(16) |
|
Net unrealized gains on investments |
363 |
|
Other comprehensive income |
321 |
|
|
|
|
Total comprehensive income |
$22,184 |
Answer: The $21,863 million in net income is the reported results of operations for the year, measured according to GAAP. In this measure, certain nonowner changes in equity are omitted, such as the effects of holding assets in foreign currencies that are subject to fluctuation, unrealized gains and losses on certain marketable securities, and the effects of hedging derivative contracts. Although these events are not reported directly in the income statement, they are disclosed in the computation of comprehensive income. By disclosing them there, the company reports the entire nonowner change in equity for the year.
Level of Learning: 3 Hard
Learning Objective: 04-06
Topic Area: Comprehensive income components
Blooms: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
107. Give an example of a major investing activity cash outflow that would be reported in the statement of cash flows for a manufacturing company.
Answer: Purchases of property, plant, and equipment would typically be a major investing cash outflow for a manufacturing company.
Level of Learning: 2 Medium
Learning Objective: 04-07
Learning Objective: 04-08
Topic Area: Statement of cash flows
Topic Area: Classifying cash flows
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
108. List at least four operating activities that would be reported in the statement of cash flows for Walmart. Assume the use of the direct method.
Answer:
Typical operating cash inflows (Walmart)
Cash collected from customers
Typical operating cash outflows (Walmart)
Payments of salaries and other operating expenses
Payments to vendors for merchandise
Payments of income taxes
Level of Learning: 2 Medium
Learning Objective: 04-08
Topic Area: Statement of cash flows – Direct method
Topic Area: Statement of cash flows – Classifying cash flows
Blooms: Apply
AACSB: Knowledge Application
AICPA: BB Critical Thinking
AICPA: FN Measurement
109. Give an example of a noncash financing and investing activity and explain when and how it would be reported in the financial statements.
Answer: The purchase of land and building in exchange for a mortgage note would be one example of a noncash financing and investing activity. Such activities can either be reported in a separate schedule in the statement of cash flows or reported in a disclosure note.
Level of Learning: 2 Medium
Learning Objective: 04-08
Topic Area: Statement of cash flows – Classifying cash flows
Blooms: Understand
AACSB: Reflective thinking
AICPA: FN Measurement
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