Kieso IFRS4 TB ch04 PDF

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CHAPTER 4INCOME STATEMENT AND RELATED INFORMATIONCHAPTER LEARNING OBJECTIVES Identify the uses and limitations of an income statement. Describe the content and format of the income statement. Discuss how to report various income items. Explain the reporting of accounting changes and errors. Describe...

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CHAPTER 4 INCOME STATEMENT AND RELATED INFORMATION CHAPTER LEARNING OBJECTIVES 1.

Identify the uses and limitations of an income statement.

2.

Describe the content and format of the income statement.

3.

Discuss how to report various income items.

4.

Explain the reporting of accounting changes and errors.

5.

Describe related equity statements.

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Test Bank to accompany Intermediate Accounting: IFRS Edition, 4e

TRUE-FALSE—Conceptual 1. The income statement is useful for helping to assess the risk or uncertainty of achieving future cash flows. Ans: T LO: 4.1 Bloom: K Difficulty: Easy Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

2. A strength of the income statement as compared to the statement of financial position is that items that cannot be measured reliably can be reported in the income statement. Ans: F LO: 4.1 Bloom: K Difficulty: Easy Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

3. Earnings management generally makes income statement information more useful for predicting future earnings and cash flows. Ans: F LO: 4.1 Bloom: K Difficulty: Easy Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

4. The transaction approach of income measurement focuses on the income-related activities that have occurred during the period. Ans: T LO: 4.2 Bloom: K Difficulty: Easy

Income Statement and Related Information

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Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

5. Income from operations represents a company’s results before financing costs are considered. Ans: T LO: 4.2 Bloom: K Difficulty: Easy Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

6. Both revenues and gains increase both net income and equity. Ans: T LO: 4.2 Bloom: K Difficulty: Easy Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

7. Companies frequently report income tax as the last item before net income on the income statement. Ans: T LO: 4.2 Bloom: K Difficulty: Easy Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

8. The income statement presents subtotals for gross profit, income before continuing operations, income before income tax, and net income. Ans: F

4-4

Test Bank to accompany Intermediate Accounting: IFRS Edition, 4e

LO: 4.2 Bloom: K Difficulty: Easy Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

9. The nature-of-expense method identifies the major cost drivers and helps users to assess whether these amounts are appropriate for the revenue generated. Ans: F LO: 4.3 Bloom: K Difficulty: Easy Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

10. Income before income taxes is computed by deducting interest expense from income from operations. Ans: T LO: 4.2 Bloom: C Difficulty: Medium Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

11. The IASB takes the position that both revenues and expenses and other income and expense should be reported as part of income from operations. Ans: T LO: 4.3 Bloom: K Difficulty: Easy Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

Income Statement and Related Information

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12. Companies report the results of operations of a component of a business that will be disposed of separately from continuing operations. Ans: T LO: 4.3 Bloom: K Difficulty: Easy Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

13. Discontinued operations and gains and losses are both reported net of tax in the income statement. Ans: F LO: 4.3 Bloom: K Difficulty: Easy Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

14. A company that reports a discontinued operation has the option of reporting per share amounts for this item. Ans: F LO: 4.3 Bloom: K Difficulty: Easy Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

15. Intraperiod tax allocation relates the income tax expense of the period to the specific items that give rise to the amount of the tax provision. Ans: T LO: 4.3 Bloom: K Difficulty: Easy Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking

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Test Bank to accompany Intermediate Accounting: IFRS Edition, 4e

AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

16. A company recognizes a change in estimate by making a retrospective adjustment to the financial statements. Ans: F LO: 4.4 Bloom: K Difficulty: Easy Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

17. Prior period adjustments can either be added or subtracted in the Retained Earnings Statement. Ans: T LO: 4.4 Bloom: K Difficulty: Easy Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

18. Companies only restrict retained earnings to comply with contractual requirements or current necessity. Ans: F LO: 4.5 Bloom: K Difficulty: Easy Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

19. Comprehensive income includes all changes in equity during a period except those resulting from distributions to owners. Ans: F LO: 4.5 Bloom: K

Income Statement and Related Information

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Difficulty: Easy Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

20. Comprehensive income includes all revenues and gains, expenses and losses, and all other non-owner changes in equity that bypass the income statement. Ans: T LO: 4.5 Bloom: K Difficulty: Easy Min: 1 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

MULTIPLE CHOICE—Conceptual 21.

The major elements of the income statement are a. gross profit, income from operations, income before income tax, and net income. b. operating section, nonoperating section, discontinued operations and non-controlling interest. c. income and expenses. d. assets, liabilities, and equity. Ans: c LO: 4.2 Bloom: K Difficulty: Easy Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

22.

Information in the income statement helps users to a. evaluate the past performance of the enterprise. b. provide a basis for predicting future performance. c. help assess the risk or uncertainty of achieving future cash flows. d. All of these answers are correct. Ans: d LO: 4.1

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Test Bank to accompany Intermediate Accounting: IFRS Edition, 4e

Bloom: K Difficulty: Easy Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None 23.

Limitations of the income statement include all of the following except a. items that cannot be measured reliably are not reported. b. only actual amounts are reported in determining net income. c. income measurement involves judgment. d. income numbers are affected by the accounting methods employed. Ans: b LO: 4.1 Bloom: K Difficulty: Easy Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

24.

Which of the following would represent the least likely use of an income statement prepared for a business enterprise? a. Use by customers to determine a company's ability to provide needed goods and services. b. Use by labor unions to examine earnings closely as a basis for salary discussions. c. Use by government agencies to formulate tax and economic policy. d. Use by investors interested in the financial position of the entity. Ans: d LO: 4.1 Bloom: K Difficulty: Easy Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e

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25.

The income statement reveals a. resources and equities of a firm at a point in time. b. resources and equities of a firm for a period of time. c. net earnings (net income) of a firm at a point in time. d. net earnings (net income) of a firm for a period of time. Ans: d LO: 4.1 Bloom: K Difficulty: Easy Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

26.

The income statement information would help in which of the following tasks? a. Evaluate the liquidity of a company. b. Evaluate the solvency of a company. c. Estimate future cash flows. d. Estimate future financial flexibility. Ans: c LO: 4.1 Bloom: K Difficulty: Easy Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

27.

Which of the following statements is true regarding managing earnings? a. Research findings indicate that companies tend to nudge their earnings numbers up by 2 to 3 cents. b. The number “4” is the least likely digit to appear in the 10ths place than any other digit. c. Rounding down remains more common than rounding up. d. All of the answer choices are true regarding managing earnings. Ans: b LO: 4.1 Bloom: C Difficulty: Medium Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

28.

Which of the following is used to manage earnings down? a. Rounding earnings results up to the nearest cent. b. Prematurely recognizing sales.

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Test Bank to accompany Intermediate Accounting: IFRS Edition, 4e

c. Cookie jar reserves. d. All of these answer choices are used to manage earnings down. Ans: c LO: 4.1 Bloom: C Difficulty: Medium Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None 29.

Which of the following items falls under the category of “income measurement involves judgment?” a. Depreciation is calculated using an accelerated depreciation method. b. An optimistic estimate is used for future warranty costs. c. Not recording in income unrealized gains and losses on certain investment securities when there is uncertainty that the change in value will be realized. d. An increase in value due to superior customer service is not recognized. Ans: b LO: 4.1 Bloom: C Difficulty: Medium Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

30.

Which of the following will result in a company reporting lower expenses and higher income? a. Using a good faith estimate of a 20-year useful life while another company’s good faith estimate is 15 years. b. Using accelerated depreciation for all newly acquired equipment. c. Paying suppliers all amounts owed before the end of the reporting period. d. Delaying billing customers for services provided before the end of the reporting period. Ans: a LO: 4.1 Bloom: C Difficulty: Medium Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

31.

The income statement provides investors and creditors information that helps them predict a. the amounts of future cash flows. b. the timing of future cash flows.

Income Statement and Related Information

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c. the uncertainty of future cash flows. d. All of these answers are correct. Ans: d LO: 4.1 Bloom: K Difficulty: Easy Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None 32.

Investors and creditors use income statement information for each of the following except to a. evaluate the future performance of the company. b. provide a basis for predicting future performance. c. help assess the risk and uncertainty of achieving future cash flows. d. compare the performance of the company to one of its competitors. Ans: a LO: 4.1 Bloom: K Difficulty: Easy Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

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Test Bank to accompany Intermediate Accounting: IFRS Edition, 4e

33.

The planned timing of revenues, expenses, gains, and losses to smooth out bumps in earnings is the definition of a. quality of earnings. b. earnings management. c. smoothing of earnings. d. earnings averaging. Ans: b LO: 4.1 Bloom: K Difficulty: Easy Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

34.

The business and investment community uses the income statement to determine a. the creditworthiness of the company. b. the investment value of the company. c. the profitability of the company. d. All of the answer choices are correct. Ans: d LO: 4.1 Bloom: K Difficulty: Easy Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

35.

Which method of income measurement is used in the preparation of the income statement? a. Capital maintenance approach. b. Transaction approach. c. Cash-flow approach. d. Income components approach. Ans: b LO: 4.2 Bloom: K Difficulty: Easy Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

36.

Which of the following equations expresses the definition of “income”? a. Income = Revenues – Expenses

Income Statement and Related Information

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b. Income = (Revenues + Gains) – (Expenses + Losses) c. Income = Revenues + Gains d. Income = Gains – Losses Ans: c LO: 4.2 Bloom: K Difficulty: Easy Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None 37.

Which of the following is not required to be presented on the income statement under IFRS? a. Revenue. b. Other gains/losses. c. Finance costs. d. Tax expense. Ans: b LO: 4.2 Bloom: C Difficulty: Medium Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

38.

The non-controlling interest section of the income statement is shown a. below net income. b. below income from operations. c. above other income and expenses. d. above income tax. Ans: a LO: 4.2 Bloom: C Difficulty: Medium Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

39.

The definition of expenses includes a. losses only. b. expenses and losses. c. expenses only. d. expenses, losses and unrealized losses on available-for-sale securities.

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Test Bank to accompany Intermediate Accounting: IFRS Edition, 4e

Ans: b LO: 4.2 Bloom: C Difficulty: Medium Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

Test Bank to accompany Intermediate Accounting: IFRS Edition, 3e IFRS requires that a single amount be disclosed within the income statement for a. the post-tax profit/loss on discontinued operations and the pre-tax gain/loss disposal of discontinued operational assets. b. the pre-tax profit/loss on discontinued operations and the post-tax gain/loss disposal of discontinued operational assets. c. the pre-tax profit/loss on discontinued operations and the pre-tax gain/loss disposal of discontinued operational assets. d. the post-tax profit/loss on discontinued operations and the post-tax gain/loss disposal of discontinued operational assets. Ans: d LO: 4.3 Bloom: C Difficulty: Medium Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

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40.

on the on the on the on the

41.

Which of the following is not a generally practiced method of presenting the income statement? a. Including prior period adjustments in determining net income. b. The condensed income statement. c. The consolidated income statement. d. Including gains and losses from discontinued operations of a component of a business in determining net income. Ans: a LO: 4.3 Bloom: C Difficulty: Medium Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

42.

Which of the following is reported in a separate section between income from operations and income before income tax? a. Selling and administrative expenses. b. Financing costs. c. Discontinued operations. d. Other income and expense. Ans: b LO: 4.3 Bloom: C Difficulty: Medium Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement

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Test Bank to accompany Intermediate Accounting: IFRS Edition, 4e

AICPA PC: Problem Solving and Decision-making IMA: None 43.

The gain or loss on sale of long-lived assets is a. added to or deducted from sales or service revenue. b. reported in a separate section between income from operations and income before income tax. c. reported as part of income from operations. d. reported as a separate item below net income. Ans: c LO: 4.3 Bloom: C Difficulty: Medium Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None

44. The nature-of-expense method a. identifies the major cost drivers of the company. b. can be arbitrary and misleading. c. is viewed as more relevant. d. is simple to apply. Ans: d LO: 4.3 Bloom: C Difficulty: Medium Min: 2-4 AACSB: Analytic AICPA BB: Strategic/Critical Thinking AICPA FN: Measurement AICPA PC: Problem Solving and Decision-making IMA: None 45.

The ____________ method is generally used in practice and would include ________ as an expense. a. function-of-expense; depreciation expense b. function-of-expense; selling expenses c. nature-of-expense; adm...