Income statement multiple choice



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CHAPTER 4—INCOME STATEMENT

MULTIPLE CHOICE

1. Gross profit is the difference between:



a.

net income and operating income

b.

revenues and expenses

c.

sales and cost of goods sold

d.

income from continuing operations and discontinued operations

e.

gross sales and sales discounts

ANS: C


2. Which of the following would be included in operating income?

a.

interest income for a manufacturing firm

b.

rent income for a leasing subsidiary

c.

gain from sale of marketable securities for a retailer

d.

dividend income for a service firm

e.

none of the answers are correct

ANS: B


3. The following relate to Data Original in 2010. What is the ending inventory?


Purchases

$540,000

Beginning Inventory

80,000

Purchase Returns

10,000

Sales

800,000

Cost of Goods Sold

490,000




a.

$120,000

b.

$140,000

c.

$210,000

d.

$260,000

e.

none of the answers are correct

ANS: A


4. Changes in account balances of Multi-Plus Inc. during 2010 were:





Increase

Assets

$420,000

Liabilities

125,000

Capital Stock

100,000

Additional Paid-In Capital

140,000

Retained Earnings

?

Assuming that there were no charges to retained earnings other than dividends of $62,000, the net income for 2010 was:



a.

($7,000)

b.

$55,000

c.

$117,000

d.

$257,000

e.

none of the answers are correct

ANS: C


5. When a company discontinues and disposes of a component segment of its operations, the gain or loss from disposal should be reported as:

a.

an adjustment to retained earnings

b.

a sale of fixed assets in "other" expense

c.

an extraordinary item

d.

an accounting change

e.

a special item after continuing operations and before extraordinary items

ANS: E


6. If the disposal of a segment meets the criteria of a disposal of a segment, then:

a.

the loss on disposal is an extraordinary item

b.

the loss on disposal is categorized as "other expense"

c.

the results of operations of the segment will be reported in conjunction with the gain or loss on disposal

d.

the disposal qualifies as a change in entity, and prior years' statements presented on comparative purposes must be restated

e.

the effects of the disposal are shown as part of operations

ANS: C


7. Which of the following would be classified as an extraordinary item on the income statement?

a.

loss from a strike

b.

correction of an error related to a prior period

c.

write-off of obsolete inventory

d.

loss on disposal of a segment of business

e.

loss from prohibition of a product

ANS: E


8. If a firm consolidates subsidiaries that are not wholly owned, an income statement item is created that is termed:

a.

dividend income

b.

minority share of earnings

c.

equity income

d.

extraordinary

e.

gain from sale of subsidiary

ANS: B


9. Which of the following will not affect retained earnings?

a.

declaration of a stock dividend

b.

payment of a cash dividend previously disclosed

c.

adjustment for an error of a prior period

d.

net income

e.

net loss

ANS: B


10. Anchor Company has 1,000,000 shares of common stock with a par value of $5. Additional paid-in capital totals $5,000,000 and retained earnings is $8,000,000. The directors declare a 10% stock dividend when the market value is $15. The reduction of retained earnings as a result of the declaration will be:

a.

$0

b.

$500,000

c.

$800,000

d.

$1,000,000

e.

$1,500,000

ANS: E


11. The stockholders' equity of Anamanda Company at September 30, 2010, is presented below:


Common Stock, par value $10, authorized 500,000 shares; 200,000 shares




issued and outstanding

$2,000,000

Paid-In Capital in Excess of Par

300,000

Retained Earnings

 1,300,000




$3,600,000

On October 1, 2010, the Board of Directors of Anamanda declared a 10% stock dividend to be distributed on November 10. The market price of the common stock was $15 on October 1 and $17 on November 10. What is the amount of the charge to retained earnings as a result of the declaration and distribution of this stock dividend?



a.

$0

b.

$200,000

c.

$300,000

d.

$340,000

e.

$750,000

ANS: C


12. Andromeda Industries had 300,000 shares of common stock with a $3 par value and retained earnings of $180,000. In 2010, earnings per share were $1.80. In 2009, the stock was split 3 for 1. Which of the following would not result from the stock split?

a.

The new shares would total 900,000.

b.

The total amount in the capital stock account would remain the same.

c.

The par value would become $1.

d.

Retained earnings would be reduced.

e.

The earnings per share for 2006 would be restated at $0.60.

ANS: D


13. Which of the following is not true about a stock dividend?

a.

With a stock dividend, the firm issues a percentage of outstanding stock as new shares to existing shareholders.

b.

The overall effect of a stock dividend is to leave total stockholders' equity and each owner's share of stockholders' equity unchanged.

c.

In theory, with a stock dividend, total market value considering all outstanding shares should not change.

d.

Since the number of shares changes under a stock dividend, any ratio based on the number of shares must be restated.

e.

The accounting for a stock dividend, assuming the distribution is relatively small, requires that the par value of the stock be removed from retained earnings.

ANS: E


14. Which of the following is not a category within accumulated other comprehensive income?

a.

post retirement commitments on health plans

b.

foreign currency translation adjustments

c.

unrealized holding gains and losses on available-for-sale marketable securities

d.

changes to stockholders equity resulting from additional minimum pension liability adjustments

e.

unrealized gains and losses from derivative instruments

ANS: A


15. Which of the following is a recurring item?

a.

equity in earnings of nonconsolidated subsidiaries

b.

error of a prior period

c.

discontinued operations

d.

extraordinary gain

e.

cumulative effect of change in accounting principle

ANS: A


16. If Investor Company owns 20% of the stock of Investee Company and Investee Company reports profits of $100,000, then Investor Company reports equity income of:

a.

$80,000

b.

$20,000

c.

$40,000

d.

$60,000

e.

none of the answers are correct

ANS: B


17. Which of the following items on the income statement is not disclosed net of tax?

a.

unusual or infrequent item disclosed separately

b.

discontinued operations

c.

extraordinary loss

d.

cumulative effect of change in accounting principle

e.

unusual or infrequent item disclosed separately and discontinued operations are both not disclosed net of tax

ANS: A


18. Which of the following will be disclosed in the reconciliation of retained earnings?

a.

adjustment for an error of a prior period

b.

net income

c.

net loss

d.

dividends

e.

all of the answers are correct

ANS: E


19. Fisher Company has 1,000,000 share of common stock with a par value of $10. Additional paid-in capital totals $10,000,000 and retained earnings is $12,000,000. The directors declare a 6% stock dividend when the market value is $5. The reduction of retained earnings as a result of the declaration will be:

a.

$0

b.

$300,000

c.

$600,000

d.

$500,000

e.

none of the answers are correct

ANS: B


20. Which of the following would be classified as an extraordinary item on the income statement?

a.

loss on disposal of a segment of business

b.

cumulative effect of a change in accounting principle

c.

a sale of land

d.

an error correction that relates to a prior year

e.

a loss from a flood in a location that would not be expected to flood


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