Spiceland 10e TB Chapter 04 Final PDF

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Intermediate Accounting, 10e (Spiceland) Chapter 4 The Income Statement, Comprehensive Income, and the Statement of Cash Flows 1) Income from continuing operations sometimes includes gains from nonoperating activities. Answer: TRUE Difficulty: 1 Easy Topic: Continuing operations―Components Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components. Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

2) Unlike the balance sheet, the income statement measures activity over a period of time. Answer: TRUE Difficulty: 1 Easy Topic: Continuing operations―Components Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components. Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

3) The single-step format of the income statement first lists all the revenues and gains included in income from continuing operations. Answer: TRUE Difficulty: 1 Easy Topic: Income statement―Single-step format Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components. Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

4) The single-step format of the income statement does not separately report nonoperating gains in the revenues section of the income statement. Answer: FALSE Difficulty: 2 Medium Topic: Income statement―Single-step format Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components. Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

5) The multiple-step format of the income statement reports a series of intermediate subtotals such as gross profit, operating income, and income before taxes. Answer: TRUE Difficulty: 1 Easy Topic: Income statement―Multiple-step format

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Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components. Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

6) Revenues and expenses typically occur as a result of normal operating activity. Answer: TRUE Difficulty: 1 Easy Topic: Continuing operations―Components Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components. Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

7) Gains and losses typically occur as a result of normal operating activity. Answer: False Difficulty: 1 Easy Topic: Continuing operations―Components Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components. Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

8) Income from continuing operations consists only of those items expected to be permanent components of earnings. Answer: FALSE Difficulty: 1 Easy Topic: Earnings quality―Components Learning Objective: 04-02 Describe earnings quality and how it is impacted by management practices to alter reported earnings. Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Risk Analysis

9) Interest expense typically is considered a temporary component of earnings. Answer: FALSE Difficulty: 2 Medium Topic: Earnings quality―Components Learning Objective: 04-03 Discuss the components of operating and nonoperating income and their relationship to earnings quality. Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Risk Analysis

10) One meaning of earnings quality is the ability of reported earnings to predict a company’s future earnings. 2 Copyright ©2020 McGraw-Hill

Answer: True Difficulty: 1 Easy Topic: Earnings quality―Components Learning Objective: 04-02 Describe earnings quality and how it is impacted by management practices to alter reported earnings. Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Risk Analysis

11) Managers’ income smoothing behavior results in reported earnings being manipulated higher in each year. Answer: False Difficulty: 2 Medium Topic: Earnings quality―Management practices Learning Objective: 04-02 Describe earnings quality and how it is impacted by management practices to alter reported earnings. Blooms: Understand AACSB: Ethics AICPA: BB Critical thinking AICPA: FN Risk Analysis

12) Classification shifting by managers leads to under-reporting of total expenses and overstatement of bottom-line net income. Answer: False Difficulty: 2 Medium Topic: Earnings quality―Management practices Learning Objective: 04-02 Describe earnings quality and how it is impacted by management practices to alter reported earnings. Blooms: Understand AACSB: Ethics AICPA: BB Critical thinking AICPA: FN Risk Analysis

13) Material restructuring costs are reported as an element of income from continuing operations. Answer: TRUE Difficulty: 1 Easy Topic: Earnings quality―Restructuring costs Learning Objective: 04-03 Discuss the components of operating and nonoperating income and their relationship to earnings quality Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

14) Restructuring costs most often refer to costs associated with management's plans to materially change the scope of business operations or the manner in which they are conducted. Answer: TRUE Difficulty: 1 Easy Topic: Earnings quality―Restructuring costs Learning Objective: 04-03 Discuss the components of operating and nonoperating income and their relationship to earnings quality Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking

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AICPA: FN Measurement

15) Intraperiod tax allocation is the process of associating income tax effects with the income statement components that create those effects. Answer: TRUE Difficulty: 1 Easy Topic: Discontinued operations Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions. Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

16) Gains, but not losses, from discontinued operations must be separately reported in an income statement. Answer: FALSE Difficulty: 1 Easy Topic: Discontinued operations Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions. Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

17) A change in accounting principle that is implemented using the retrospective approach includes restating financial statements of all periods presented as if the new standard had been used in those periods. Answer: TRUE Difficulty: 2 Medium Topic: Accounting changes and error corrections Learning Objective: 04-05 Discuss additional reporting issues related to accounting changes, error corrections, and earnings per share (EPS). Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

18) A change in accounting principle that is implemented using the modified retrospective approach includes implementing the change in the current period only and not adjusting for the cumulative effects on prior periods. Answer: FALSE Difficulty: 2 Medium Topic: Accounting changes and error corrections Learning Objective: 04-05 Discuss additional reporting issues related to accounting changes, error corrections, and earnings per share (EPS). Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

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19) Changes in estimates are accounted for using the prospective approach. Answer: TRUE Difficulty: 2 Medium Topic: Accounting changes and error corrections Learning Objective: 04-05 Discuss additional reporting issues related to accounting changes, error corrections, and earnings per share (EPS). Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

20) Material errors in prior periods' income statements are corrected by making an adjustment to the beginning balance of the current period's retained earnings. Answer: TRUE Difficulty: 1 Easy Topic: Accounting changes and error corrections Learning Objective: 04-05 Discuss additional reporting issues related to accounting changes, error corrections, and earnings per share (EPS). Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

21) Earnings per share disclosure is required only for income from continuing operations. Answer: FALSE Difficulty: 1 Easy Topic: Earnings per share Learning Objective: 04-05 Discuss additional reporting issues related to accounting changes, error corrections, and earnings per share (EPS). Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

22) Comprehensive income reports an expanded version of income to include certain types of gains and losses not included in traditional income statements. Answer: TRUE Difficulty: 1 Easy Topic: Comprehensive income―Components-Presentation Learning Objective: 04-06 Explain the difference between net income and comprehensive income and how we report components of the difference. Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

23) Comprehensive income is the total change in shareholders' equity that occurred during the period. Answer: FALSE Difficulty: 1 Easy Topic: Comprehensive income―Components-Presentation Learning Objective: 04-06 Explain the difference between net income and comprehensive income and how we report

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components of the difference. Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

24) The direct and indirect methods of reporting the statement of cash flows present different information for investing and financing activities. Answer: FALSE Difficulty: 1 Easy Topic: Statement of cash flows―Classify O-I-F Learning Objective: 04-08 Identify and describe the various classifications of cash flows presented in a statement of cash flows. Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

25) Income statements prepared according to either U.S. GAAP or International Financial Reporting Standards (IFRS) require the separate reporting of discontinued operations. Answer: TRUE Difficulty: 1 Easy Topic: IFRS―Income statement Learning Objective: 04-09 Discuss the primary differences between U.S. GAAP and IFRS with respect to the income statement, statement of comprehensive income, and statement of cash flows. Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement

26) International Financial Reporting Standards (IFRS) require a company to classify expenses in an income statement by function. Answer: FALSE Difficulty: 1 Easy Topic: IFRS―Income statement Learning Objective: 04-09 Discuss the primary differences between U.S. GAAP and IFRS with respect to the income statement, statement of comprehensive income, and statement of cash flows. Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement

27) In a statement of cash flows prepared under International Financial Reporting Standards (IFRS), interest received is most often classified as an operating cash flow. Answer: FALSE Difficulty: 1 Easy Topic: IFRS―Statement of cash flows Learning Objective: 04-09 Discuss the primary differences between U.S. GAAP and IFRS with respect to the income statement, statement of comprehensive income, and statement of cash flows. Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity

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AICPA: BB Global AICPA: FN Measurement

28) In a statement of cash flows prepared under International Financial Reporting Standards (IFRS), interest paid is most often classified as a financing cash flow. Answer: TRUE Difficulty: 1 Easy Topic: IFRS―Statement of cash flows Learning Objective: 04-09 Discuss the primary differences between U.S. GAAP and IFRS with respect to the income statement, statement of comprehensive income, and statement of cash flows. Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement

29) A decrease in the receivables turnover ratio indicates a decrease in the time between credit sales and cash collection. Answer: FALSE Difficulty: 2 Medium Topic: Profitability analysis Learning Objective: 04-10 Identify and calculate the common ratios used to assess profitability. Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Resource management AICPA: FN Risk Analysis

30) The decomposition of return on assets illustrates why some companies with low profit margins can be very profitable if their asset turnover is high. Answer: TRUE Difficulty: 2 Medium Topic: Profitability analysis Learning Objective: 04-10 Identify and calculate the common ratios used to assess profitability. Blooms: Understand AACSB: Reflective Thinking AICPA: BB Resource management AICPA: FN Risk Analysis

31) A company could improve its return on assets by increasing its income or by increasing its total assets. Answer: FALSE Difficulty: 2 Medium Topic: Profitability analysis Learning Objective: 04-10 Identify and calculate the common ratios used to assess profitability. Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Resource management AICPA: FN Risk Analysis

32) Return on equity is increased if a firm can maintain its return on assets but increase its leverage. 7 Copyright ©2020 McGraw-Hill

Answer: TRUE Difficulty: 2 Medium Topic: Profitability analysis Learning Objective: 04-10 Identify and calculate the common ratios used to assess profitability. Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Resource management AICPA: FN Risk Analysis

33) 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 Difficulty: 1 Easy Topic: Income statement―Single-step format; Income statement―Multiple-step format Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components. Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

34) Most real-world income statements are presented using which format? A) Income-step. B) Single-step. C) Magnitude-step. D) Multiple-step. Answer: D Difficulty: 1 Easy Topic: Income statement―Multiple-step format Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components. Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

35) A primary advantage of the multiple-step format of the income statement over the single-step format is that the multiple-step format: A) classifies expenses by function. B) results in a higher amount of net income. C) separately lists income tax expense. D) lists revenues and expenses in order of their dollar amount. Answer: A Difficulty: 1 Easy Topic: Income statement―Multiple-step format Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components. Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

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36) Which of the following profit amounts usually will be listed in both the single-step and multiple-step formats of the income statement? A) Gross profit. B) Operating income. C) Income before taxes. D) Net nonoperating income. Answer: C Difficulty: 2 Medium Topic: Income statement―Multiple-step format Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components. Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

37) The relationship between revenue from selling inventory and the cost of that inventory is measured as: A) Net income. B) Gross profit. C) Income before taxes. D) Operating income. Answer: B Difficulty: 2 Medium Topic: Income statement―Multiple-step format Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components. Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

38) The measure of profit reported on a multiple-step income statement that represents the primary-revenue generating activities of the company is: A) Net income. B) Gross profit. C) Income before taxes. D) Operating income. Answer: D Difficulty: 2 Medium Topic: Income statement―Multiple-step format Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components. Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

39) 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 9 Copyright ©2020 McGraw-Hill

operations. C) a line item within income from continuing operations. D) a line item in the retained earnings statement. Answer: C Difficulty: 2 Medium Topic: Continuing operations―Components Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components. Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical thinking AICPA: FN Measurement

40) Provincial Inc. reported the following before-tax income statement items: Operating income Nonoperating losses

$ 700,000 (100,000)

Provincial has a 25% income tax rate. Provincial would report the following amount of income tax expense as a separately stated line item in the income statement: A) $200,000. B) $150,000. C) $175,000. D) $160,000. Answer: B Explanation: ($700,000 − $100,000) × 25% = $150,000 Difficulty: 2 Medium Topic: Income tax―Separate line or Intraperiod Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components. Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical thinking AICPA: FN Measurement

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41) Freda's Florist reported the following before-tax income statement items for the year ended December 31, 2021: Operating income Income on discontinued operations

$ 200,000 80,000

All income statement items are subject to a 25% income tax rate. In its 2021 income statement, Freda's separately stated income tax expense and total income tax expense would be: A) $70,000 and $70,000, respectively. B) $70,000 and $50,000, respectively. C) $50,000 and $70,000, respectively. D) $50,000 and $50,000, respectively. Answer: C Explanation: Income tax expense stated separately ($200,000 × 25%) Tax expense due to discontinued operations ($80,000 × 25%) Total income tax expense

$

50,000 20,000 $

70,000

Difficulty: 3 Hard Topic: Income tax―Separate line or Intraperiod Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components.; 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions. Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical thinking AICPA: FN Measurement

42) Earn...