CHAPTER 4—INCOME STATEMENT
MULTIPLE CHOICE
1. Gross profit is the difference between:
a.
|
net income and operating income
|
b.
|
revenues and expenses
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c.
|
sales and cost of goods sold
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d.
|
income from continuing operations and discontinued operations
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e.
|
gross sales and sales discounts
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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
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c.
|
gain from sale of marketable securities for a retailer
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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
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$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
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$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
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ANS: B
9. Which of the following will not affect retained earnings?
a.
|
declaration of a stock dividend
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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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