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question pool ch 11 Accounting.doc, Lecture notes of Accounting

Abertay UniversityAccounting

question pool ch 11 Accounting.doc

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Financial Accounting, 9e (Harrison/Horngren/Thomas)
Chapter 11 The Income Statement, the Statement of
Comprehensive Income, & the Statement of Stockholders' Equity
11.1 Learning Objective 11-1
1) The revenue recognition principle requires that sales revenues be recognized when they
are earned.
Answer: TRUE
Diff: 1
LO: 11-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Reporting
2) U.S. GAAP and IFRS do not have the same revenue recognition criteria.
Answer: TRUE
Diff: 2
LO: 11-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Reporting
3) Recognizing revenue before it is earned is a major source of financial statement fraud.
Answer: TRUE
Diff: 1
LO: 11-1
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
4) Financial statement fraud does not include the improper recognition of expenses.
Answer: FALSE
Diff: 1
LO: 11-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
5) Gross profit measures the overall profitability of a company.
Answer: FALSE
Diff: 1
LO: 11-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Reporting
1
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
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Financial Accounting, 9e (Harrison/Horngren/Thomas)

Chapter 11 The Income Statement, the Statement of

Comprehensive Income, & the Statement of Stockholders' Equity

11.1 Learning Objective 11-

  1. The revenue recognition principle requires that sales revenues be recognized when they are earned. Answer: TRUE Diff: 1 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  2. U.S. GAAP and IFRS do not have the same revenue recognition criteria. Answer: TRUE Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  3. Recognizing revenue before it is earned is a major source of financial statement fraud. Answer: TRUE Diff: 1 LO: 11- AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  4. Financial statement fraud does not include the improper recognition of expenses. Answer: FALSE Diff: 1 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  5. Gross profit measures the overall profitability of a company. Answer: FALSE Diff: 1 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  1. If net sales are $1,200,000 and cost of goods sold are $300,000, gross profit is $900,000. Answer: TRUE Diff: 1 LO: 11- AASCB: Analytical Skills AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  2. Gross profit is calculated by dividing cost of goods sold by net sales. Answer: FALSE Diff: 1 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  3. The purpose of channel stuffing is to increase operating expenses. Answer: TRUE Diff: 1 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  4. Roughly half of all financial statement frauds over the past two decades have involved: A) improper expense recognition. B) improper revenue recognition. C) improper depreciation methods. D) bankruptcy. Answer: B Diff: 1 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  5. A type of financial statement fraud that is accomplished by shipping more to customers than they ordered, with the expectation that they may return some or all of the items is called: A) improper shipping recognition. B) improper sales recognition. C) channel stuffing. D) accidental shipping. Answer: C Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  1. The gross profit rate is computed by dividing gross profit by: A) cost of goods sold. B) net sales. C) net income. D) operating expenses. Answer: B Diff: 1 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  2. Ongoing expenses incurred by the entity, other than direct expenses for merchandise and other costs directly related to sales, are called: A) other expenses. B) extraordinary items. C) cost of goods sold. D) operating expenses. Answer: D Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  3. The operating expense section of an income statement would NOT include: A) salaries expense. B) utilities expense. C) supplies expense. D) interest expense. Answer: D Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  4. There will be income from operations if: A) revenues are greater than cost of goods sold. B) revenues are greater than operating expenses. C) gross profit is greater than operating expenses. D) cost of goods sold is greater than operating expenses. Answer: C Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  1. The characteristic of earnings that makes it most useful for decision making is called: A) extraordinary item. B) earnings quality. C) comprehensive income. D) clean opinion. Answer: B Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  2. The degree to which earnings are an accurate reflection of underlying economic events for both revenues and expenses, and the extent to which earnings from a company's core operations are improving over time, is: A) earnings quality. B) comprehensive income. C) revenue recognition. D) discontinued operations. Answer: A Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  3. Components of earnings quality include all of the following EXCEPT: A) low operating expenses compared to sales. B) high and improving gross margin. C) a low gross profit. D) proper revenue and expense recognition. Answer: C Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  1. The net of foreign-currency transaction gains and losses will appear on the balance sheet. Answer: FALSE Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  2. Foreign-currency transaction losses can be avoided if international transactions are settled in U.S. dollars. Answer: TRUE Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  3. Hedging enables an entity to protect itself from losing money in a foreign transaction by engaging in a counterbalancing transaction. Answer: TRUE Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  4. On June 15, Central Computers, Inc. sold twenty-five computers on account to a company located in Argentina for 3,000,000 pesos. On that date, the peso is worth $0.079. On July 15, when the peso was worth $0.070, payment was received. The journal entry to record the sale on June 15 would include a: A) debit to Accounts Receivable $237, B) debit to Accounts Receivable $210,000. C) debit to Foreign-Currency Transaction Loss $27,000. D) credit to Sales $210,000. Answer: A Diff: 2 LO: 11- AASCB: Analytical Skills AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  1. On June 15, Central Computers, Inc. sold twenty-five computers, on account, to a company located in Argentina for 3,000,000 pesos. On that date the peso is worth $0.079. On July 15, when the peso was worth $0.070, payment was received. The journal entry to record the July 15 collection on account would include a: A) credit to Cash $237, B) credit to Accounts Receivable $210,000. C) debit to Foreign-Currency Transaction Loss $27,000. D) credit to Sales $210,000. Answer: B Diff: 2 LO: 11- AASCB: Analytical Skills AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  2. On August 1, Central Computers, Inc. purchased thirty computer chips, on account, from a company located in Taiwan for 500,000 Taiwan dollars. On that date the Taiwan dollar is worth $0.040. On September 1, when the Taiwan dollar was worth $0.038, payment was made. The journal entry to record the sale on August 1 would include a: A) credit to Accounts Payable $19,000. B) credit to Accounts Payable $20,000. C) credit to Foreign-Currency Transaction Gain $1,000. D) credit to Cash $20,000. Answer: B Diff: 2 LO: 11- AASCB: Analytical Skills AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  3. On August 1, Central Computers, Inc. purchased thirty computer chips, on account, from a company located in Taiwan for 500,000 Taiwan dollars. On that date the Taiwan dollar is worth $0.040. On September 1, when the Taiwan dollar was worth $0.038, payment was made. The journal entry to record the payment on September 1 would include a: A) debit to Accounts Payable $19,000. B) debit to Foreign-Currency Transaction Loss $1,000. C) credit to Foreign-Currency Transaction Gain $1,000. D) credit to Cash $20,000. Answer: C Diff: 2 LO: 11- AASCB: Analytical Skills AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  1. Operating income includes income from discontinued operations. Answer: FALSE Diff: 1 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  2. When a company discontinues a segment of its business, the income statement should report income (loss) from continuing operations and income (loss) from discontinued operations. Answer: TRUE Diff: 1 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  3. Extraordinary gains and losses are shown "net of tax" on the income statement. Answer: TRUE Diff: 1 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  4. An event or transaction should be considered as an extraordinary item if it is unusual in nature and if it occurs infrequently. Answer: TRUE Diff: 1 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  5. Income tax expense appears on the: A) tax return. B) statement of stockholders' equity. C) income statement. D) balance sheet. Answer: C Diff: 1 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  1. Income tax payable appears on the: A) tax return. B) statement of stockholders' equity. C) income statement. D) balance sheet. Answer: D Diff: 1 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  2. The amount of tax to pay the government in the next period is known as: A) deferred tax asset. B) deferred tax liability. C) income tax expense. D) income tax payable. Answer: D Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  3. Which of the following statements is true? A) The income tax return is prepared using GAAP. B) The income tax return is prepared using rules set by the SEC. C) The income tax return is prepared using rules set by the IRS. D) The income tax return and the financial statements are the same documents. Answer: C Diff: 3 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  4. The formula to determine income tax expense is: A) taxable income (from the income tax return) multiplied by the income tax rate. B) taxable income(from the income statement) multiplied by the income tax rate. C) income before income tax expense (from the tax return) multiplied by the income tax rate. D) income before income tax expense (from the income statement) multiplied by the income tax rate. Answer: D Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  1. Western Corporation has taxable income of $390,000 and pretax accounting income of $363,000. The company's income tax rate is 35%. The entry to record the income tax includes a: A) debit to Income Tax Expense $136,500. B) debit to Deferred Tax Asset $127,050. C) debit to Deferred Tax Asset $9,450. D) credit to Income Tax Payable $127,050. Answer: C Explanation: C) Debit Income tax expense 127, Debit Deferred Tax Asset (27,000 × .35) 9, Credit Income Tax Payable (390,000 × .35) 136, Diff: 3 LO: 11- AASCB: Analytical Skills AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  2. The estimated value of a company's stock is less than the current market value of the company. The appropriate investment decision should be to: A) buy the company's stock. B) hold the company's stock. C) sell the company's stock. D) purchase the bond's that the company has issued. Answer: C Diff: 2 LO: 11- AASCB: Analytical Skills AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  3. Current earnings per share information is as follows: Continuing operations $3. Discontinued operations 1. Extraordinary items 0. $5. The interest capitalization rate is 7.5%. How much should an investor pay for a share of stock? A) $50. B) $58. C) $64. D) $70. Answer: A Explanation: A) 3.75/.075 = 50 Diff: 2 LO: 11- AASCB: Analytical Skills AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  4. The gain or loss on the disposal of a business segment is shown on the income statement as: A) an extraordinary item. B) part of discontinued operations C) part of income from operations.

D) other gains or losses. Answer: B Diff: 2 LO: 11- AASCB: Analytical Skills AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

  1. The disposal of a segment of a business is called: A) an extraordinary item. B) other expense. C) a sales transaction. D) discontinued operations. Answer: C Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  2. The discontinued operations section of the income statement refers to the: A) loss on products that did not sell. B) discontinuance of a product line. C) disposal of out of date equipment. D) disposal of a segment of a business. Answer: D Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  3. The loss incurred as a result of writing down obsolete inventory should be reported as: A) part of discontinued operations. B) an operating expense. C) other expenses and losses. D) an extraordinary item. Answer: C Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

  1. Central City, Inc. has incurred a $50,000 loss on property due to an earthquake. Earthquakes have occurred in this region. What amount will be reported for this loss on company's income statement, assuming a 30% tax rate? A) $50, B) $35, C) $15, D) Zero, due to the fact that this event is infrequent in nature. Answer: B Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  2. Extraordinary items: A) include the expropriation of a company's assets by a foreign government. B) include the loss from the sale or exchange of equipment. C) are treated the same under IFRS and GAAP. D) include the gains and losses due to management restructuring. Answer: A Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  3. All of the following are true regarding changes in accounting principles EXCEPT: A) Accounting changes are allowed when new principles are preferred over previous ones. B) The company retrospectively restates all prior-period amounts as though the new accounting method had been in effect all along. C) The majority of the changes in accounting principles are reported in the current period when the change in principle occurred. D) If an accounting change impacts periods prior to the earliest one presented in the current income statement, an adjustment to retained earnings must be made. Answer: C Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  4. When a change in accounting principle occurs, the: A) cumulative effect of the change should be reported in the current year's retained earnings statement. B) change should be reported retroactively. C) old accounting principle should be used for the current year. D) new accounting principle should be used starting in the current year, with no change to the prior years. Answer: B Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  5. Changes in accounting estimates: A) are not allowed under GAAP.

B) are a prior period adjustment C) are reported for the current and future periods on the new basis. D) require prior financial statements to be restated. Answer: C Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting

  1. Items appear on the income statement in which order? A) Extraordinary items, Discontinued operations, Other revenues and expenses B) Discontinued operations, Extraordinary items, Other revenues and expenses C) Other revenues and expenses, Discontinued operations, Extraordinary items D) Other revenues and expenses, Extraordinary items, Discontinued operations Answer: C Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  1. The income statement provides better information about a company than the statement of cash flows. Answer: FALSE Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  2. Prior-period adjustments appear on the statement of retained earnings. Answer: TRUE Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  3. Prior-period adjustments are reported on the income statement. Answer: FALSE Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  4. A correction in income of a prior-period requires a debit to the Retained Earnings account. Answer: FALSE Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  5. A prior-period adjustment is reported as an adjustment to the beginning balance of retained earnings. Answer: TRUE Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  6. Earnings per share is calculated: A) only for preferred stock. B) only for common stock. C) for common and preferred stock. D) only for treasury stock. Answer: B Diff: 1 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  1. The amount of a company's net income per share of its outstanding common stock is: A) net income per share. B) gross profit per share. C) earnings per share. D) taxable income per share. Answer: C Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  2. The ratio that uses weighted-average number of shares of common stock outstanding in the denominator is the: A) earnings per share. B) gross profit percentage. C) price-earnings ratio. D) current ratio. Answer: A Diff: 2 LO: 11- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  3. Earnings per share (EPS) is calculated as: A) the number of shares of common stock outstanding at the end of the year divided by net income. B) net income divided by the number of shares of common stock outstanding at the end of the year. C) net income divided by the average number of shares of common stock outstanding throughout the year. D) the average number of shares of common stock outstanding throughout the year divided by net income. Answer: C Diff: 2 LO: 11- AASCB: Analytical Skills AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  4. When calculating earnings per share, preferred dividends are: A) added to net income in the numerator of the EPS calculation. B) added to common shares in the denominator of the EPS calculation. C) subtracted from common shares in the denominator of the EPS calculation. D) subtracted from net income in the numerator of the EPS calculation. Answer: D Diff: 2 LO: 11- AASCB: Analytical Skills AICPA Bus Persp: Legal/Regulatory AICPA Functional: Reporting
  5. A company is required to report both basic and diluted earnings per share when the: A) company's capital structure includes convertible preferred stock. B) company has extraordinary gains and losses. C) company has discontinued operations. D) company reports both net income and comprehensive income.