Acc/531 Week 4

Chapter 04
The Income Statement and Statement of Cash Flows

True / False Questions

1. Income from continuing operations sometimes includes gains from nonoperating activities.
True False

2. Intraperiod tax allocation is the process of associating income tax effects with the income statement components that create those effects.
True False

3. Material restructuring costs are reported as an element of income from continuing operations.
True False

4. Earnings quality refers to the ability of reported earnings (income) to predict future earnings.
True False

5. Gains, but not losses, from discontinued operations must be separately reported in an income statement.
True False

6. An item must meet
the subjective criteria of being either unusual or infrequent to be reported as extraordinary.
True False

7. The definition of what constitutes an extraordinary item should be independent of the operating environment.
True False

8. Income statements prepared according to both U.S. GAAP and International Financial Reporting Standards require the separate reporting, as an extraordinary item, of material gains and losses from events that are both unusual and infrequent.
True False

9. A change in depreciation method is accounted for by retrospectively revising prior years' financial statements.
True False

10. Changes in accounting estimates require disclosure of their effects, if material, on current year net income and EPS but do not require restatement of prior years' financial statements.
True False

11. The income effect of a change in reporting entity is shown separately in the income statement in the year of the change.
True False

12. EPS disclosure is required only for income from continuing operations.
True False

13. Comprehensive income reports an expanded version of income to include certain types of gains and losses not included in traditional income statements.
True False

14. Comprehensive income is the total change in shareholders' equity that occurred during the period.
True False

15. The direct and indirect methods of reporting the statement of cash flows present different information for investing and financing activities.
True False

16. International Financial Reporting Standards require a company to classify expenses in an income by function.
True False

17. Under International Financial Reporting Standards, the components of other comprehensive income can be presented in the statement of shareholders' equity.
True False

18. In a statement of cash flows prepared under International Financial Reporting Standards, interest received is most often classified as an operating cash flow.
True False

19. In a statement of cash flows prepared under International Financial Reporting Standards, interest paid is most often classified as a financing cash flow.
True False

Matching Questions

20. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

|1. Taxable income | Also known as income tax expense. | ____ |
|2. Intraperiod tax allocation | From transactions or events that are not likely to occur in the | ____ |
| |foreseeable future. | |
|3. Prior period adjustment | Associates tax with income statement items. | ____ |
|4. Provision for income tax | Used as the base for computing taxes currently payable. | ____ |
|5. Transitory earnings | Made to correct a material error. | ____ |

21. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

|1. Operating activities (income | Is directly related to the principal revenue-generating | ____ |
|statement) |activities. | |
|2. Matching principle | Requires note disclosure, if material. | ____ |
|3. Income from continuing operations | Expenses are recognized in the same period as the related | ____ |
| |revenues. | |
|4. Income from discontinued | Income from an identifiable component will cease. | ____ |
|operations | | |
|5. Change in accounting estimate | More useful to analysts in predicting future income than current| ____ |
| |net income. | |

22. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

|1.
Single-step income statement | Not directly related to a firm's principal | ____ |
| |revenue-generating activities. | |
|2. Financing activities | Likely to be discontinued within a year. | ____ |
|3. Held for sale component | Groups all revenues and gains. | ____ |
|4. Nonoperating activities (income | Related to the acquisition and disposition of long-term | ____ |
|statement) |assets. | |
|5. Investing activities | Related to the external financing of the company. | ____ |

23. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

|1. Cumulative effect of a change in accounting| Reported in the nonoperating section of the income | ____
|
|principle |statement. | |
|2. Discontinued operations | Reported net of tax immediately after income from | ____ |
| |continuing operations. | |
|3. Gain/loss from sale of investments | No longer included in current income for voluntary | ____ |
| |changes in accounting principle. | |
|4. Multiple-step income statement | Reports intermediate subtotals in arriving at net | ____ |
| |income. | |
|5. Direct method | Reports the cash effects of each operating activity | ____ |
| |directly on the statement. | |

24. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

|1. Earnings per share | Required disclosure for publicly traded corporations. | ____ |
|2. Indirect method | If sold or held for sale, reported as a discontinued operation. | ____ |
|3. Restructuring costs | Separately stated component of continuing operations. | ____ |
|4. Earnings quality | Calculations work backward from net income to cash flow from operating | ____ |
| |activities. | |
|5. Component of an entity | Ability of reported income to predict future earnings. | ____ |

25. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

|1. Extraordinary items | The acquisition of assets by issuing debt or equity | ____ |
| |securities. | |
|2. Operating activities (SCF) | Costs incurred often relate to downsizing. | ____ |
|3. Restructuring costs | Total nonowner change in equity for a reporting | ____ |
| |period. | |
|4. Non-cash financing and investing activities | Unusual, infrequent, and material gains and losses. | ____ |
|5. Comprehensive income | When grouped together, essentially net income on a cash| ____ |
| |basis. | |

26. Listed below are ten terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

|1. Earnings per share | Required disclosure for publicly traded corporations. | ____ |
|2. Comprehensive income | Component of the entity has been sold or will be sold. | ____ |
|3. Restructuring costs | Costs generally associated with downsizing. | ____ |
|4. Multiple-step income statement | Reports a series of intermediate subtotals. | ____ |
|5. Extraordinary items | Accounted for prospectively. | ____ |
|6. Change in estimate | Tangentially related to normal operations. | ____ |
|7. Nonoperating income | Accounted for retrospectively by revising prior years' | ____ |
| |statements. | |
|8. Change in accounting principle | Unusual, infrequent, and material gains and losses. | ____ |
|9. Discontinued operations | Total nonowner change in equity. | ____ |
|10. Earnings quality | Ability of reported income to predict future earnings. | ____ |

Multiple Choice Questions

27. Intraperiod income tax presentation is primarily a matter of:
A. Valuation.
B. Going concern.
C. Periodicity.
D. Allocation.

28. The difference between single-step and multiple-step income statements is primarily an issue of:
A. Consistency.
B. Presentation.
C. Measurement.
D. Valuation.

29. Popson Inc. incurred a material loss which was not unusual in character, but was clearly an infrequent occurrence. This loss should be reported as:
A. An extraordinary loss.
B. A separate line item between income from continuing operations and income from discontinued operations.
C. A separate line item within income from continuing operations.
D. A separate line item in the retained earnings statement.

30. Provincial Inc. reported the following before-tax income statement items: [pic]
Provincial has a 30% income tax rate.
Provincial would report the following amount of income tax expense as a separate item in the income statement:
A. $198,000.
B. $180,000.
C. $168,000.
D. $150,000.

31. Freda's Florist reported the following before-tax income statement items for the year ended December 31, 2011: [pic]
All income statement items are subject to a 40% income tax rate. In its 2011 income statement, Freda's separately stated income tax expense and total income tax expense would be:
A. $128,000 and $128,000, respectively.
B. $128,000 and $100,000, respectively.
C. $100,000 and $128,000, respectively.
D. $100,000 and $100,000, respectively.

32. Pro forma earnings:
A. Are management's view of permanent earnings.
B. Are needed for the correction of errors.
C. Are standardized under generally accepted accounting principles.
D. Are useful to compare two different firms' performance.

33. The distinction between operating and nonoperating income relates to:
A. Continuity of income.
B. Principal activities of the reporting entity.
C. Consistency of income stream.
D. Reliability of measurements.

34. The principal benefit of separately reporting discontinued operations and extraordinary items is to enhance:
A. Predictive ability.
B. Consistency in reporting.
C. Intraperiod continuity.
D. Comprehensive reporting.

35. The Claxton Company manufactures children's toys and also has a division that makes automobile parts. Due to a change in its strategic focus, the company sold the automobile parts division. The division qualifies as a component of the entity according to GAAP regarding disposal of long-lived assets. How should Claxton report the sale in its 2011 income statement?
A. As an extraordinary item.
B. As a discontinued operation, reported below income from continuing operations.
C. Report the income or loss from operations of the division in discontinued operations below continuing operations and the gain or loss from disposal in continuing operations.
D. None of the above.

36. On August 1, 2011, Rocket Retailers adopted a plan to discontinue its catalog sales division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by June 30, 2012. On January 31, 2012, Rocket's fiscal year-end, the following information relative to the discontinued division was accumulated: [pic]
In its income statement for the year ended January 31, 2012, Rocket would report a before-tax loss on discontinued operations of:
A. $115,000.
B. $195,000.
C. $65,000.
D. $125,000.

37. On November 1, 2011, Jamison Inc. adopted a plan to discontinue its barge division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by April 30, 2012. On December 31, 2011, the company's year-end, the following information relative to the discontinued division was accumulated: [pic]
In its income statement for the year ended December 31, 2011, Jamison would report a before-tax loss on discontinued operations of:
A. $65 million.
B. $50 million.
C. $130 million.
D. $145 million.

On October 28, 2011, Mercedes Company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations and was properly classified as held for sale on December 31, 2011, the end of the company's fiscal year. The division's loss from operations for 2011 was $2,000,000.

38. The division's book value and fair value less cost to sell on December 31 were $3,000,000 and $2,500,000, respectively. What before-tax amount(s) should Mercedes report as loss on discontinued operations in its 2011 income statement?
A. $2,000,000 loss.
B. $2,500,000 loss.
C. None.
D. $500,000 impairment loss included in continuing operations and a $2,000,000 loss from discontinued operations.

39. The division's book value and fair value less cost to sell on December 31 were $3,000,000 and $3,500,000, respectively. What before-tax amount(s) should Mercedes report as loss on discontinued operations in its 2011 income statement?
A. $2,000,000 loss.
B. $2,500,000 loss.
C. None.
D. $500,000 gain included in continuing operations and a $2,000,000 loss from discontinued operations.

On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for $80 million. The sale was completed on December 31, 2011.
The following additional facts pertain to the transaction:
( The Footwear Division qualifies as a component of the entity according to GAAP regarding discontinued operations.
( The book value of Footwear's assets totaled $48 million on the date of the sale.
( Footwear's operating income was a pre-tax loss of $10 million in 2011.
( Foxtrot's income tax rate is 40%.

40. In the 2011 income statement for Foxtrot Co., it would report:
A. Income (loss) on its total operations for the year without separation.
B. Income (loss) on its continuing operation only.
C. Income (loss) from its continuing and discontinued operations separately.
D. Income and gains separately from losses.

41. In the 2011 income statement for Foxtrot Co., it would report:
A. All income taxes would be combined into one line item.
B. Income taxes would be separated for continuing and discontinued operations.
C. Income taxes would be reported for income and gains only.
D. None of the above is correct.

42. In the 2011 income statement for Foxtrot Co., it would report income from discontinued operations of:
A. $9.2 million.
B. $13.2 million.
C. $22 million.
D. $26 million.

43. Suppose that the Footwear Division's assets had not been sold by December 31, 2011, but were considered held for sale. Assume that the fair value of these assets at December 31 was $40 million. In the 2011 income statement for Foxtrot Co., it would report a loss from discontinued operations of:
A. $3 million loss
B. $10 million loss
C. $10.8 million loss
D. $18 million loss

44. Suppose that the Footwear Division's assets had not been sold by December 31, 2011, but were considered held for sale. Assume that the fair value of these assets at December 31 was $80 million. In the 2011 income statement for Foxtrot Co., under discontinued operations it would report a:
A. $6 million loss
B. $10 million loss
C. $13.2 million income
D. None of the above is correct.

45. An extraordinary event for financial reporting purposes is both:
A. Unusual and material.
B. Infrequent and significant.
C. Material and infrequent.
D. Unusual and infrequent.

46. Major Co. reported 2011 income of $300,000 from continuing operations before income taxes and a before-tax extraordinary loss of $80,000. All income is subject to a 30% tax rate. In the 2011 income statement, Major Co. would show the following line-item amounts for income tax expense and net income:
A. $66,000 and $210,000.
B. $90,000 and $154,000.
C. $90,000 and $276,000.
D. $66,000 and $220,000.

47. Howard Co.'s 2011 income from continuing operations before income taxes was $280,000. Howard Co. reported a before-tax extraordinary gain of $50,000. All tax items are subject to a 40% tax rate. In its income statement for 2011, Howard Co. would show the following line-item amounts for net income and income tax expense:
A. $198,000 and $112,000.
B. $230,000 and $92,000.
C. $330,000 and $132,000.
D. $198,000 and $79,000.

Misty Company reported the following before-tax items during the current year: [pic]
Misty's effective tax rate is 40%.

48. What would be Misty's income before extraordinary item(s)?
A. $198.
B. $210.
C. $330.
D. $360.

49. What would be Misty's net income for the current year?
A. $148.
B. $168.
C. $112.
D. None of the amounts given is correct.

50. Cal's Cookies reported 2011 before-tax income before extraordinary items of $152,000 and a before-tax extraordinary loss of $32,000. All tax items are subject to a 30% tax rate. In its 2011 income statement, Cal's would report the following amounts as separate line items for net income and income tax expense:
A. $120,000 and $36,000.
B. $84,000 and $45,600.
C. $84,000 and $36,000.
D. $120,000 and $45,600.

51. A voluntary change in accounting principle is accounted for by:
A. A cumulative effect on income in the year of the change.
B. A retrospective reporting of all comparative financial statements shown.
C. A prior period adjustment.
D. A separate line component of income.

52. A change in depreciation method is accounted for:
A. Retrospectively.
B. As a cumulative adjustment to income in the year of change.
C. Prospectively, like changes in accounting estimates.
D. None of the above.

53. On June 1, 2011, Romano Inc. changed the estimated useful life of its office equipment from 20 to 12 years. This change would be accounted for:
A. Prospectively.
B. Retrospectively.
C. As an accounting error.
D. None of the above.

54. The financial statement presentation of a change in depreciation method is most similar to that of reporting:
A. Changes in accounting estimates.
B. Prior period adjustments.
C. Correction of errors.
D. Extraordinary items.

55. Jack's Fireworks, which was established in 2009, changed its method of accounting for inventories from the average cost method to the first-in, first-out (FIFO) method in 2011. Cost of goods sold for the periods 2009-2011 under FIFO and the average cost method were: [pic]
Jack's Fireworks is subject to a 30% income tax rate. In its income statement for the year ended December 31, 2011, Jack's would report the cumulative effect of a change in accounting principle, net of income taxes, of: [pic]
A. Option a
B. Option b
C. Option c
D. Option d

56. Changes in accounting estimates are reported:
A. Currently and prospectively.
B. Retroactively and currently.
C. Retroactively, currently, and prospectively.
D. By restating prior years.

57. In its December 31, 2011 financial statements, E-Z Prices estimated that losses on its current receivables would be $10.2 million. During 2012, E-Z Prices determined that the losses on the Dec. 31, 2011, receivables were actually $12.4 million. Ignoring taxes, E-Z Prices would report, in its 2012 financial statements, the additional $2.2 million loss on receivables as:
A. An extraordinary item.
B. A prior period adjustment.
C. A retroactive adjustment.
D. A current year's expense.

58. The financial statement presentation of a change in reporting entity is most similar to the reporting of a:
A. Change in accounting principle.
B. Change in accounting estimate.
C. Discontinued business operation.
D. Correction of a material error discovered after the year the error was made.

59. If Company A acquires Company B, required financial statement disclosures include all of the following except:
A. The effect of the change on net income.
B. The effect of the change on market share.
C. The effect of the change on income before extraordinary items.
D. The per share effects of the change.

60. Harley Davis Inc. started its unicycle manufacturing business in 2009 and acquired $600,000 of equipment at the beginning of 2009. It decided to use the double-declining balance (DDB) depreciation on its equipment with no residual value and a 10-year useful life. In 2011 it changed to the straight-line depreciation method. Depreciation computed for 2009-2010 is presented below: [pic]
In 2011, Harley Davis would report depreciation of:
A. $96,000.
B. $38,400.
C. $60,000.
D. $48,000.

61. Elmore Co. purchased an offset press on January 1, 2008, at a cost of $120,000. The press had an estimated eight-year life with no residual value. Elmore uses straight-line depreciation. At January 1, 2011, Elmore estimated that the press would have only three more years of remaining life with no residual value. For 2011, Elmore would report depreciation of:
A. $25,000.
B. $15,000.
C. $20,000.
D. $30,000.

62. Pablo purchased a lathe on January 1, 2009, at a cost of $45,000. At the time of purchase, the lathe was expected to have a five-year economic life and a residual value of $3,000. Pablo uses straight-line depreciation. At the beginning of 2011, Pablo estimated the lathe to have a remaining life of four years with no residual value. For the year ended December 31, 2011, Pablo would report depreciation of:
A. $7,500.
B. $7,050.
C. $7,000.
D. $6,750.

63. Cendant Corporation's results for the year ended December 31, 2011, include the following material items: [pic]
Cendant Corporation's income from continuing operations before income taxes for 2011 is:
A. $900,000.
B. $880,000.
C. $820,000.
D. $320,000.

64. Which of the following is not true about EPS?
A. It must be reported by all corporations whose stock is publicly traded.
B. It must be reported separately for discontinued operations.
C. It must be reported separately for extraordinary items.
D. It must be reported on operating income.

65. The Maytag Corporation's income statement includes income from continuing operations, a loss from discontinued operations, and extraordinary items. Earnings per share information would be provided for:
A. Net income only.
B. Income from continuing operations and net income only.
C. Income from continuing operations, loss from discontinued operations and net income only.
D. Income from continuing operations, loss from discontinued operations, extraordinary items and net income.

66. Each of the following would be reported as items of other comprehensive income except:
A. Foreign currency translation gains.
B. Unrealized gains on investments accounted for as securities available for sale.
C. Deferred gains from derivatives.
D. Gains from the sale of equipment.

67. Reporting comprehensive income in the United States can be accomplished by which of the following methods:
A. In the statement of shareholders' equity.
B. A combined statement of income and comprehensive income.
C. A separate statement of comprehensive income.
D. All of the above are acceptable methods.

68. Reporting comprehensive income according to International Financial Reporting Standards can be accomplished by each of the following methods except:
A. In the statement of shareholders' equity.
B. A combined statement of income and comprehensive income.
C. A separate statement of comprehensive income.
D. The entity may choose either (b) or (c).

69. Comprehensive income is the change in equity from:
A. Owner transactions.
B. Nonowner transactions.
C. Owner or nonowner transactions.
D. Capital transactions.

70. Reconciliation between net income and comprehensive income would include:
A. Unrealized losses but not unrealized gains on available for sale securities.
B. Unrealized gains but not unrealized losses on available for sale securities.
C. Unrealized losses and unrealized gains on available for sale securities.
D. Neither unrealized losses nor unrealized gains on available for sale securities.

71. Change statements include a:
A. Retained earnings statement, a balance sheet, and a cash flow statement.
B. Balance sheet, a cash flow statement, and an income statement.
C. Cash flow statement, an income statement, and a retained earnings statement.
D. Retained earnings statement, a balance sheet, and an income statement.

72. In comparing the direct method with the indirect method of preparing the statement of cash flows:
A. Only operating activities are presented differently.
B. Only investing activities are presented differently.
C. Only financing activities are presented differently.
D. All activities are presented differently.

73. The statement of cash flows reports cash flows from the activities of:
A. Operating, purchasing, and investing.
B. Borrowing, paying, and investing.
C. Financing, investing, and operating.
D. Using, investing, and financing.

74. Operating cash flows would exclude:
A. Interest received.
B. Interest paid.
C. Dividends paid.
D. Dividends received.

75. Operating cash outflows would include:
A. Purchase of investments.
B. Purchase of equipment.
C. Payment of cash dividends.
D. Purchases of inventory.

76. Cash flows from investing do not include cash flows from:
A. Lending money to another corporation.
B. The sale of equipment.
C. Borrowing.
D. The purchase of other corporation's securities.

77. Cash flows from financing activities include:
A. Interest received.
B. Interest paid.
C. Dividends received.
D. Dividends paid.

78. Cash flows from investing activities do not include:
A. Proceeds from issuing bonds.
B. Payment for the purchase of equipment.
C. Proceeds from the sale of marketable securities.
D. Cash outflows from acquiring land.

79. The FASB's stated preference for reporting operating cash flows is the:
A. Indirect method.
B. Direct method.
C. Working capital method.
D. All financial resources method.

80. In the operating activities section of the statement of cash flows, we start with net income:
A. In the direct method.
B. In the indirect method.
C. In both the direct and the indirect methods.
D. In neither the direct nor the indirect methods.

81. Which of the following is added to net income as an adjustment under the indirect method of preparing the statement of cash flows?
A. Salaries payable decrease.
B. Gain on the sale of land.
C. Loss on the sale of equipment.
D. Accounts receivable increase.

82. Schneider Inc. had salaries payable of $60,000 and $90,000 at the end of 2010 and 2011, respectively. During 2011, Schneider recorded $620,000 in salaries expense in its income statement. Cash outflows for salaries in 2011 were:
A. $590,000.
B. $620,000.
C. $650,000.
D. $530,000.

83. Tropical Tours reported revenue of $400,000 for its year ended December 31, 2011. Accounts receivable at December 31, 2010 and 2011, were $35,000 and $32,000, respectively. Using the direct method for reporting cash flows from operating activities, Tropical Tours would report cash collected from customers of:
A. $400,000.
B. $397,000.
C. $403,000.
D. $365,000.

84. Shively Mfg. Co. sold for $18,000 equipment that cost $40,000 and had a book value of $30,000. Shively would report:
A. Operating cash inflows of $18,000.
B. Operating cash inflows of $8,000.
C. Financing cash inflows of $18,000.
D. Investing cash inflows of $18,000.

85. Arrow Printers paid $2,000 interest on short-term notes payable, $10,000 interest on long-term bonds, and $6,000 in dividends on its common stock. Arrow would report cash outflows from activities, as follows:
A. Operating, $2,000; financing $16,000.
B. Operating, $0; financing $18,000.
C. Operating, $12,000; financing $6,000.
D. Operating, $18,000; financing $0.

86. Hong Kong Clothiers reported revenue of $5,000,000 for its year ended December 31, 2011. Accounts receivable at December 31, 2010 and 2011, were $320,000 and $355,000, respectively. Using the direct method for reporting cash flows from operating activities, Hong Kong Clothiers would report cash collected from customers of:
A. $4,965,000.
B. $5,000,000.
C. $5,035,000.
D. $5,045,000.

87. Lucia Ltd. reported net income of $135,000 for the year ended December 31, 2011. January 1 balances in accounts receivable and accounts payable were $29,000 and $26,000 respectively. Year-end balances in these accounts were $30,000 and $24,000, respectively. Assuming that all relevant information has been presented, Lucia's cash flows from operating activities would be:
A. $132,000.
B. $134,000.
C. $136,000.
D. $138,000.

88. Shady Lane's income tax payable account decreased from $14 million to $12 million during 2011. If its income tax expense was $80 million, what would be shown as an operating cash flow under the direct method?
A. A cash outflow of $12 million.
B. A cash outflow of $78 million.
C. A cash outflow of $80 million.
D. A cash outflow of $82 million.

89. Bird Brain Co. reported net income of $45,000 for the year ended December 31, 2011. January 1 balances in accounts receivable and accounts payable were $23,000 and $26,000 respectively. Year-end balances in these accounts were $22,000 and $28,000, respectively. Assuming that all relevant information has been presented, Bird Brain's cash flows from operating activities would be:
A. $48,000.
B. $44,000.
C. $46,000.
D. $45,000.

90. Nevada Boot Co. reported net income of $216,000 for its year ended December 31, 2011. Purchases totaled $152,000. Accounts payable balances at the beginning and end of the year were $36,000 and $33,000, respectively. Beginning and ending inventory balances were $44,000 and $46,000, respectively. Assuming that all relevant information has been presented, Nevada Boot would report operating cash flows of:
A. $155,000.
B. $221,000.
C. $211,000.
D. $151,000.

Rowdy's Restaurants Cash Flow (in millions) [pic]

91. Rowdy's would report net cash inflows (outflows) from operating activities in the amount of:
A. $(80).
B. $120.
C. $200.
D. $420.

92. Rowdy's would report net cash inflows (outflows) from investing activities in the amount of:
A. $(4,000).
B. $100.
C. $(3,900).
D. $(1,900).

93. Rowdy's would report net cash inflows (outflows) from financing activities in the amount of:
A. $1,100.
B. $(1,100).
C. $820.
D. $900.

94. Expenses in an income statement prepared under International Financial Reporting Standards:
A. Must be classified by function.
B. Must be classified by natural description.
C. Can be classified either by function or by natural description.
D. None of the above is correct.

95. In a statement of cash flows prepared under International Financial Reporting Standards, each of the following items is typically classified as a financing cash flow except:
A. Interest paid.
B. Dividends paid.
C. Proceeds from the issuance of long-term debt.
D. Dividends received.

96. Jacobsen Corporation prepares its financial statement applying U.S. GAAP. During its 2011 fiscal year, the company reported before-tax income of $620,000. This amount does not include the following two items, both of which are considered to be material in amount: [pic]
The company's income tax rate is 40%. In its 2011 income statement, Jacobsen would report income from continuing operations of:
A. $312,000.
B. $372,000.
C. $492,000.
D. $620,000.

97. Jacobsen Corporation prepares its financial statement applying International Financial Reporting Standards. During its 2011 fiscal year, the company reported before-tax income of $620,000. This amount does not include the following two items, both of which are considered to be material in amount: [pic]
The company's income tax rate is 40%. In its 2011 income statement, Jacobsen would report income from continuing operations of:
A. $312,000.
B. $372,000.
C. $492,000.
D. $620,000.

Essay Questions

On September 1, 2011, Jacob Furniture Mart enters into a tentative agreement to sell the assets of its office equipment division. This division qualifies as a component of the entity according to GAAP regarding discontinued operations. The division's contribution to Jacob's operating income for 2011 was a $3 million loss before taxes. Jacob has an average tax rate of 30%.
Required: Consider independently the appropriate accounting by Jacob under the three scenarios below.

98. Scenario 1: Assume that Jacob sold the division's assets on December 31, 2011, for $24 million. The book value of the division's assets was $19 million at that date. Under these assumptions, what would Jacob report in its 2011 income statement regarding the office equipment division? Explain where this information would be presented.

99. Scenario 2: Assume that Jacob had not yet sold the division's assets by the end of 2011. Further, assume that the fair value less costs to sell of the division's assets at 12/31/11 was $24 million and was expected to remain the same when the assets are sold in 2012. The book value of the division's assets was $19 million at the end of the year. Under these assumptions, what would Jacob report in its 2011 income statement regarding the office equipment division? Explain where this information would be presented.

100. Scenario 3: Assume that Jacob had not yet sold the office furniture division by the end of 2011. Further, assume that the fair value less costs to sell of the division's assets at 12/31/11 was $12 million and was expected to remain the same when the assets are sold in 2012. The book value of the division's assets was $19 million at the end of the year. Under these assumptions, what would Jacob report in its 2011 income statement regarding the office equipment division? Explain where this information would be presented.

101. Canton Corporation reported the following items in its adjusted trial balance for the year ended December 31, 2011: [pic]
Required: Prepare the December 31, 2011, income statement for Canton Corporation, starting with income from continuing operations before income taxes.

102. Paris Company reported the following items in its December 31, 2011, year-end adjusted trial balance: [pic]
Required: Prepare the December 31, 2011, income statement for Paris Company starting with income from continuing operations before income taxes.

103. Worthington Inc. began operations January 1, 2010. In 2012 it changed its method of accounting for inventories from the average cost method to first-in, first-out (FIFO). If ending inventory had been determined under each of these two methods for both years, the results would have been: [pic]
The company's income for 2011 and 2010 under average cost was $83,500 and $78,600, respectively. The income tax rate for Worthington is 30%.
Required: Determine restated net income for Worthington Inc. for 2011 and 2010, after retrospectively applying the change in accounting principle.

104. Luke Corporation began operations January 1, 2010, purchasing equipment for $200,000. The equipment is estimated to have a five year useful life with no residual value. In 2012, Luke changed its method of depreciating equipment from double-declining balance to straight-line. If depreciation expense had been computed under each of these two methods for 2010-2011, the results would have been: [pic]
Required: Compute the depreciation expense that Luke would report for 2012.

105. Aggie Co. purchased equipment on January 1, 2006, at a cost of $650,000. The asset was estimated to have a 12-year life with a residual value of $50,000. Aggie uses straight-line depreciation. In 2011, Aggie revised its total estimated life to 10 years, with no residual value.
Required: Prepare journal entries to record Aggie's depreciation expense for 2010 and 2011. Show computations.

106. Early in January 2011, the internal auditors for Arkansas Inc. discovered these errors and omissions in their review of the 2010 financial records. Arkansas Inc. has not yet closed its books for 2010.
1. A $1,600 sale made to Ed's Automotive in December, 2010 was incorrectly charged to the account of Ed's Upholstery.
2. A $21,000 premium for a one-year fire and extended coverage insurance policy covering the policy period May 1, 2010 to April 30, 2011, was initially recorded as expense and has not been adjusted.
3. The December 31, 2009, balance of accounts receivable was materially overstated by $18,000 as a result of an error.
Required: Prepare any necessary entries required for the above items. Ignore income taxes.

107. The internal auditors for Rockford Products discovered early in 2011 these errors and omissions in their review of the 2010 financial records. The 2010 financial statements have already been issued.
1. A material liability for salaries of $13,000 at December 31, 2010, was not recorded. The salaries were charged to salary expense when paid.
2. Equipment costing $5,500 was purchased without first securing a competitive bid, in violation of company policy.
3. Prior year's depreciation expense was materially understated by $13,500 due to a computation error.
Required: Prepare any necessary journal entries required as a result of the findings of the internal auditors. Ignore income tax effects.

[pic]
Plano had 50,000 shares of stock outstanding throughout the year. Income tax expense has not yet been accrued. The effective tax rate is 30%.

108. Required: Prepare a single-step income statement with basic earnings per share disclosure.

109. Required: Prepare a multiple-step income statement with earnings per share disclosure.

110. The following income statement items appeared on the adjusted trial balance of Foxworthy Corporation for the year ended December 31, 2011 ($ in 000s): sales revenue, $22,300; cost of goods sold, $14,500; selling expenses, $2,300; general and administrative expenses, $1,200; dividend revenue from investments, $200; interest expense, $300. Income taxes have not yet been accrued. The company's income tax rate is 40% on all items of income or loss. These revenue and expense items appear in the company's income statement every year. The company's controller, however, has asked for your help in determining the appropriate treatment of the following nonrecurring transactions that also occurred during 2011 ($ in 000s). All transactions are material in amount.
1. Investments were sold during the year at a loss of $300. Foxworthy also had unrealized losses of $200 for the year on investments accounted for as securities available for sale.
2. One of the company's factories was closed during the year. Restructuring costs incurred were $2,000.
3. One of Foxworthy's manufacturing facilities located in a foreign country was expropriated. A loss of $800 was recognized. The event is considered to be unusual and infrequent.
4. During the year, Foxworthy completed the sale of one of its operating divisions that qualifies as a component of the entity according to GAAP regarding discontinued operations. The division had incurred operating income of $800 in 2011 prior to the sale, and its assets were sold at a loss of $1,800.
5. In 2011, the company's accountant discovered that depreciation expense in 2010 for the office building was overstated by $300.
6. Foreign currency translation gains for the year totaled $600.
Required: Prepare Foxworthy's combined statement of income and comprehensive income for 2011, including basic earnings per share disclosures. Two million shares of common stock were outstanding throughout the year.

The trial balance of Lakewood Inc. included the following accounts as of December 31, 2011: [pic]
Lakewood Inc. had 100,000 shares of stock outstanding throughout the year. Income tax expense has not yet been accrued. The effective tax rate is 30%.

111. Required: Prepare a single-step income statement with basic earnings per share disclosure.

112. Required: Prepare a multiple-step income statement with earnings per share disclosure.

113. Calstone, Inc. prepares an annual combined statement of income and comprehensive income. The following situations occurred during the company's 2011 fiscal year:
1. An earthquake destroyed a manufacturing facility. The event is considered to be unusual and infrequent in occurrence.
2. Land that had been held as an investment was sold and a gain was recognized.
3. Losses from foreign currency translation were recognized.
4. Interest revenue was recognized.
5. A division was sold that qualifies as a separate component according to GAAP regarding discontinued operations.
6. Unrealized losses on investments accounted for as securities available for sale were recorded.
7. The controller discovered an error in the calculation of 2010's revenue.
8. Restructuring costs were incurred due to downsizing and reorganization of a manufacturing facility.
Required:
For each situation, identify the appropriate reporting treatment from the list below (consider each event to be material).
a. As a component of operating income.
b. As a nonoperating income item (other income or expense).
c. As a separately reported item.
d. As an item of other comprehensive income.
e. As an adjustment to retained earnings.

114. The following information is for Redwood Inc. for the year ended December 31, 2011. Redwood had a cash and cash equivalents balance of $5,200 on January 1, 2011. [pic]
Required: Prepare a statement of cash flows for the year using the direct method for operating activities.

115. The chief accountant for Julius Co. provides you with the company's most recent income statement and comparative balance sheets below. The accountant has asked for your help in preparing part of the company's 2011 statement of cash flows. [pic]
Required: In the space provided below, determine the cash flow from operating activities for Julius Co., using the direct method.

116. The accounting records of Rockness Company provided the data below ($ in 000s). [pic]
Required: Prepare a reconciliation of net income to net cash flows from operating activities.

117. Cahill & Sons earned before -tax income of $450,000 for its 2011 fiscal year. During the year the company experienced a $310,000 loss resulting from the expropriation of assets in a foreign country. The amount of the loss is material and the event is considered to be unusual and infrequent. The loss is not included in the $450,000 income figure. The company's income tax rate is 30%.
Required: 1. Prepare a partial 2011 income statement for Cahill starting with income before tax and any separately reported items.
2. Repeat requirement 1 assuming that Cahill prepares its financial statements according to International Financial Reporting Standards.

118. The statement of cash flows for the year ended December 31, 2011 for Whiteside Incorporated is presented below. [pic]
Required: Prepare the statement of cash flows assuming that Whiteside prepares its financial statements according to International Financial Reporting Standards. Where IFRS allows flexibility, use the classification used most often in IFRS financial statements.

Instructions: The following answers to essay questions point out the key phrases that should appear in students' answers. They are not intended to be examples of complete student responses. It would be helpful to provide instructions to students on how brief or in-depth you would like their answers to be.

119. Briefly explain when and why intraperiod tax allocation is necessary.

120. Briefly explain why the income statement is referred to as a change statement.

121. Net income, often referred to as "the bottom line," is not always a good predictor of future income. Explain this statement.

122. Explain, using an example, how a company can use earnings management and justify it by conservatism.

123. In a recent press release, Foot Locker Inc. reported that its fiscal first-quarter net income fell 46% due to losses related to discontinued operations, but earnings from continuing operations jumped 19% amid a modest increase in sales. The specialty athletic retailer said net was $20 million for the quarter ended May 4, compared with net of $37 million a year earlier. The latest results included a loss of $18 million from discontinued operations. Last year, the company had earnings of $5 million, or four cents a share, from discontinued operations. Foot Locker said earnings from continuing operations were $38 million, compared with $32 million a year earlier. Discuss how Foot Locker's press release relates to its earnings quality.

124. In a recent press release, Estee Lauder Co. reported "a fiscal fourth-quarter loss due to a restructuring charge but said it expects to see earnings growth in its fiscal second through fourth quarters." The New York skincare and cosmetics company reported a net loss of $25.4 million, or 13 cents a share, for the quarter ended June 30, compared with net income of $20.4 million, or six cents a share, a year earlier. Excluding the restructuring charge of $76.9 million, or 32 cents a share, the company said profit would have been $51.5 million, or 19 cents a share. Discuss how Estee Lauder's press release relates to its earnings quality.

125. Briefly define extraordinary items and explain how they are reported according to U.S. GAAP.

126. Many income statement numbers are based on estimates. Explain the reporting required when the income effect of a change in estimate is material.

127. Presented below is an excerpt ($ in millions) from the 2009 annual report to shareholders of Microsoft Corporation. Explain how the shareholder should interpret the difference between the net income and total comprehensive income for Microsoft in 2009. [pic]

128. Give an example of a major investing activity cash outflow that would be reported in the statement of cash flows for a manufacturing company.

129. List at least four operating activities that would be reported in the statement of cash flows for Wal-Mart. Assume the use of the direct method.

130. Give an example of a non-cash financing and investing activity and explain when and how it would be reported in the financial statements.

131. Briefly discuss at least two differences between income statements prepared under U.S. GAAP and IFRS.

Chapter 04 The Income Statement and Statement of Cash Flows Answer Key

True / False Questions

1. Income from continuing operations sometimes includes gains from nonoperating activities.
TRUE

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components.
Level of Learning: Easy

2. Intraperiod tax allocation is the process of associating income tax effects with the income statement components that create those effects.
TRUE

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components.
Level of Learning: Easy

3. Material restructuring costs are reported as an element of income from continuing operations.
TRUE

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components.
Level of Learning: Easy

4. Earnings quality refers to the ability of reported earnings (income) to predict future earnings.
TRUE

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-02 Describe earnings quality and how it is impacted by management practices to manipulate earnings.
Level of Learning: Easy

5. Gains, but not losses, from discontinued operations must be separately reported in an income statement.
FALSE

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
Level of Learning: Easy

6. An item must meet the subjective criteria of being either unusual or infrequent to be reported as extraordinary.
FALSE

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Level of Learning: Easy

7. The definition of what constitutes an extraordinary item should be independent of the operating environment.
FALSE

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Level of Learning: Easy

8. Income statements prepared according to both U.S. GAAP and International Financial Reporting Standards require the separate reporting, as an extraordinary item, of material gains and losses from events that are both unusual and infrequent.
FALSE

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Learning Objective: 04-12 Discuss the primary differences between U.S. GAAP and IFRS with respect to the income statement and statement of cash flows.
Level of Learning: Easy

9. A change in depreciation method is accounted for by retrospectively revising prior years' financial statements.
FALSE

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-06 Describe the measurement and reporting requirements for a change in accounting principle.
Level of Learning: Easy

10. Changes in accounting estimates require disclosure of their effects, if material, on current year net income and EPS but do not require restatement of prior years' financial statements.
TRUE

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-07 Explain the accounting treatments of changes in estimates and correction of errors.
Level of Learning: Easy

11. The income effect of a change in reporting entity is shown separately in the income statement in the year of the change.
FALSE

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-07 Explain the accounting treatments of changes in estimates and correction of errors.
Level of Learning: Easy

12. EPS disclosure is required only for income from continuing operations.
FALSE

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-08 Define earnings per share (EPS) and explain required disclosures of EPS for certain income statement components.
Level of Learning: Easy

13. Comprehensive income reports an expanded version of income to include certain types of gains and losses not included in traditional income statements.
TRUE

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-09 Explain the difference between net income and comprehensive income and how we report components of the difference.
Level of Learning: Easy

14. Comprehensive income is the total change in shareholders' equity that occurred during the period.
FALSE

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-09 Explain the difference between net income and comprehensive income and how we report components of the difference.
Level of Learning: Easy

15. The direct and indirect methods of reporting the statement of cash flows present different information for investing and financing activities.
FALSE

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Easy

16. International Financial Reporting Standards require a company to classify expenses in an income by function.
FALSE

AACSB: Reflective thinking, Diversity
Bloom's: Knowledge
Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components.
Learning Objective: 04-12 Discuss the primary differences between U.S. GAAP and IFRS with respect to the income statement and statement of cash flows.
Level of Learning: Easy

17. Under International Financial Reporting Standards, the components of other comprehensive income can be presented in the statement of shareholders' equity.
FALSE

AACSB: Reflective thinking, Diversity
Bloom's: Knowledge
Learning Objective: 04-09 Explain the difference between net income and comprehensive income and how we report components of the difference.
Learning Objective: 04-12 Discuss the primary differences between U.S. GAAP and IFRS with respect to the income statement and statement of cash flows.
Level of Learning: Easy

18. In a statement of cash flows prepared under International Financial Reporting Standards, interest received is most often classified as an operating cash flow.
FALSE

AACSB: Reflective thinking, Diversity
Bloom's: Knowledge
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Learning Objective: 04-12 Discuss the primary differences between U.S. GAAP and IFRS with respect to the income statement and statement of cash flows.
Level of Learning: Easy

19. In a statement of cash flows prepared under International Financial Reporting Standards, interest paid is most often classified as a financing cash flow.
TRUE

AACSB: Reflective thinking, Diversity
Bloom's: Knowledge
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Learning Objective: 04-12 Discuss the primary differences between U.S. GAAP and IFRS with respect to the income statement and statement of cash flows.
Level of Learning: Easy

Matching Questions

20. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

|1. Taxable income | Also known as income tax expense. | 4 |
|2. Intraperiod tax allocation | From transactions or events that are not likely to occur in the foreseeable| 5 |
| |future. | |
|3. Prior period adjustment | Associates tax with income statement items. | 2 |
|4. Provision for income tax | Used as the base for computing taxes currently payable. | 1 |
|5. Transitory earnings | Made to correct a material error. | 3 |

AACSB: Reflective thinking
Bloom's: Comprehension

21. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

|1. Operating activities (income | Is directly related to the principal revenue-generating | 1 |
|statement) |activities. | |
|2. Matching principle | Requires note disclosure, if material. | 5 |
|3. Income from continuing operations | Expenses are recognized in the same period as the related | 2 |
| |revenues. | |
|4. Income from discontinued operations | Income from an identifiable component will cease. | 4 |
|5. Change in accounting estimate | More useful to analysts in predicting future income than current | 3 |
| |net income. | |

AACSB: Reflective thinking
Bloom's: Comprehension

22. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

|1. Single-step income statement | Not directly related to a firm's principal revenue-generating | 4 |
| |activities. | |
|2. Financing activities | Likely to be discontinued within a year. | 3 |
|3. Held for sale component | Groups all revenues and gains. | 1 |
|4. Nonoperating activities (income | Related to the acquisition and disposition of long-term | 5 |
|statement) |assets. | |
|5. Investing activities | Related to the external financing of the company. | 2 |

AACSB: Reflective thinking
Bloom's: Comprehension

23. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

|1. Cumulative effect of a change in accounting | Reported in the nonoperating section of the income | 3 |
|principle |statement. | |
|2. Discontinued operations | Reported net of tax immediately after income from continuing| 2 |
| |operations. | |
|3. Gain/loss from sale of investments | No longer included in current income for voluntary changes | 1 |
| |in accounting principle. | |
|4. Multiple-step income statement | Reports intermediate subtotals in arriving at net income. | 4 |
|5. Direct method | Reports the cash effects of each operating activity directly| 5 |
| |on the statement. | |

AACSB: Reflective thinking
Bloom's: Comprehension

24. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

|1. Earnings per share | Required disclosure for publicly traded corporations. | 1 |
|2. Indirect method | If sold or held for sale, reported as a discontinued operation. | 5 |
|3. Restructuring costs | Separately stated component of continuing operations. | 3 |
|4. Earnings quality | Calculations work backward from net income to cash flow from operating | 2 |
| |activities. | |
|5. Component of an entity | Ability of reported income to predict future earnings. | 4 |

AACSB: Reflective thinking
Bloom's: Comprehension

25. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

|1. Extraordinary items | The acquisition of assets by issuing debt or equity | 4 |
| |securities. | |
|2. Operating activities (SCF) | Costs incurred often relate to downsizing. | 3 |
|3. Restructuring costs | Total nonowner change in equity for a reporting period. | 5 |
|4. Non-cash financing and investing activities | Unusual, infrequent, and material gains and losses. | 1 |
|5. Comprehensive income | When grouped together, essentially net income on a cash | 2 |
| |basis. | |

AACSB: Reflective thinking
Bloom's: Comprehension

26. Listed below are ten terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term placing the letter designating the best term in the space provided by the phrase.

|1. Earnings per share | Required disclosure for publicly traded corporations. | 1 |
|2. Comprehensive income | Component of the entity has been sold or will be sold. | 9 |
|3. Restructuring costs | Costs generally associated with downsizing. | 3 |
|4. Multiple-step income statement | Reports a series of intermediate subtotals. | 4 |
|5. Extraordinary items | Accounted for prospectively. | 6 |
|6. Change in estimate | Tangentially related to normal operations. | 7 |
|7. Nonoperating income | Accounted for retrospectively by revising prior years' | 8 |
| |statements. | |
|8. Change in accounting principle | Unusual, infrequent, and material gains and losses. | 5 |
|9. Discontinued operations | Total nonowner change in equity. | 2 |
|10. Earnings quality | Ability of reported income to predict future earnings. | 10 |

AACSB: Reflective thinking
Bloom's: Comprehension

Multiple Choice Questions

27. Intraperiod income tax presentation is primarily a matter of:
A. Valuation.
B. Going concern.
C. Periodicity.
D. Allocation.

AACSB: Reflective thinking
Bloom's: Comprehension
Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components.
Level of Learning: Easy

28. The difference between single-step and multiple-step income statements is primarily an issue of:
A. Consistency.
B. Presentation.
C. Measurement.
D. Valuation.

AACSB: Reflective thinking
Bloom's: Comprehension
Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components.
Level of Learning: Easy

29. Popson Inc. incurred a material loss which was not unusual in character, but was clearly an infrequent occurrence. This loss should be reported as:
A. An extraordinary loss.
B. A separate line item between income from continuing operations and income from discontinued operations.
C. A separate line item within income from continuing operations.
D. A separate line item in the retained earnings statement.

AACSB: Reflective thinking
Bloom's: Comprehension
Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components.
Level of Learning: Medium

30. Provincial Inc. reported the following before-tax income statement items: [pic]
Provincial has a 30% income tax rate.
Provincial would report the following amount of income tax expense as a separate item in the income statement:
A. $198,000.
B. $180,000.
C. $168,000.
D. $150,000.

$600,000 x 30% = $180,000

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components.
Level of Learning: Medium

31. Freda's Florist reported the following before-tax income statement items for the year ended December 31, 2011: [pic]
All income statement items are subject to a 40% income tax rate. In its 2011 income statement, Freda's separately stated income tax expense and total income tax expense would be:
A. $128,000 and $128,000, respectively.
B. $128,000 and $100,000, respectively.
C. $100,000 and $128,000, respectively.
D. $100,000 and $100,000, respectively.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components.
Level of Learning: Hard

32. Pro forma earnings:
A. Are management's view of permanent earnings.
B. Are needed for the correction of errors.
C. Are standardized under generally accepted accounting principles.
D. Are useful to compare two different firms' performance.

AACSB: Reflective thinking
Bloom's: Comprehension
Learning Objective: 04-02 Describe earnings quality and how it is impacted by management practices to manipulate earnings.
Level of Learning: Easy

33. The distinction between operating and nonoperating income relates to:
A. Continuity of income.
B. Principal activities of the reporting entity.
C. Consistency of income stream.
D. Reliability of measurements.

AACSB: Reflective thinking
Bloom's: Comprehension
Learning Objective: 04-03 Discuss the components of operating and nonoperating income and their relationship to earnings quality.
Level of Learning: Medium

34. The principal benefit of separately reporting discontinued operations and extraordinary items is to enhance:
A. Predictive ability.
B. Consistency in reporting.
C. Intraperiod continuity.
D. Comprehensive reporting.

AACSB: Reflective thinking
Bloom's: Comprehension
Learning Objective: 04-03 Discuss the components of operating and nonoperating income and their relationship to earnings quality.
Level of Learning: Medium

35. The Claxton Company manufactures children's toys and also has a division that makes automobile parts. Due to a change in its strategic focus, the company sold the automobile parts division. The division qualifies as a component of the entity according to GAAP regarding disposal of long-lived assets. How should Claxton report the sale in its 2011 income statement?
A. As an extraordinary item.
B. As a discontinued operation, reported below income from continuing operations.
C. Report the income or loss from operations of the division in discontinued operations below continuing operations and the gain or loss from disposal in continuing operations.
D. None of the above.

AACSB: Reflective thinking
Bloom's: Comprehension
Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
Level of Learning: Medium

36. On August 1, 2011, Rocket Retailers adopted a plan to discontinue its catalog sales division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by June 30, 2012. On January 31, 2012, Rocket's fiscal year-end, the following information relative to the discontinued division was accumulated: [pic]
In its income statement for the year ended January 31, 2012, Rocket would report a before-tax loss on discontinued operations of:
A. $115,000.
B. $195,000.
C. $65,000.
D. $125,000.

$(115,000) + $(10,000) = $(125,000)

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
Level of Learning: Medium

37. On November 1, 2011, Jamison Inc. adopted a plan to discontinue its barge division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by April 30, 2012. On December 31, 2011, the company's year-end, the following information relative to the discontinued division was accumulated: [pic]
In its income statement for the year ended December 31, 2011, Jamison would report a before-tax loss on discontinued operations of:
A. $65 million.
B. $50 million.
C. $130 million.
D. $145 million.

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
Level of Learning: Medium

On October 28, 2011, Mercedes Company committed to a plan to sell a division that qualified as a component of the entity according to GAAP regarding discontinued operations and was properly classified as held for sale on December 31, 2011, the end of the company's fiscal year. The division's loss from operations for 2011 was $2,000,000.

38. The division's book value and fair value less cost to sell on December 31 were $3,000,000 and $2,500,000, respectively. What before-tax amount(s) should Mercedes report as loss on discontinued operations in its 2011 income statement?
A. $2,000,000 loss.
B. $2,500,000 loss.
C. None.
D. $500,000 impairment loss included in continuing operations and a $2,000,000 loss from discontinued operations.

$2,000,000 loss from operations and $500,000 impairment loss = $2,500,000.

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
Level of Learning: Hard

39. The division's book value and fair value less cost to sell on December 31 were $3,000,000 and $3,500,000, respectively. What before-tax amount(s) should Mercedes report as loss on discontinued operations in its 2011 income statement?
A. $2,000,000 loss.
B. $2,500,000 loss.
C. None.
D. $500,000 gain included in continuing operations and a $2,000,000 loss from discontinued operations.

$2,000,000 loss from operations only. There is no impairment loss.

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
Level of Learning: Hard

On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for $80 million. The sale was completed on December 31, 2011.
The following additional facts pertain to the transaction:
( The Footwear Division qualifies as a component of the entity according to GAAP regarding discontinued operations.
( The book value of Footwear's assets totaled $48 million on the date of the sale.
( Footwear's operating income was a pre-tax loss of $10 million in 2011.
( Foxtrot's income tax rate is 40%.

40. In the 2011 income statement for Foxtrot Co., it would report:
A. Income (loss) on its total operations for the year without separation.
B. Income (loss) on its continuing operation only.
C. Income (loss) from its continuing and discontinued operations separately.
D. Income and gains separately from losses.

AACSB: Analytic
Bloom's: Synthesis
Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
Level of Learning: Medium

41. In the 2011 income statement for Foxtrot Co., it would report:
A. All income taxes would be combined into one line item.
B. Income taxes would be separated for continuing and discontinued operations.
C. Income taxes would be reported for income and gains only.
D. None of the above is correct.

AACSB: Analytic
Bloom's: Synthesis
Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
Level of Learning: Medium

42. In the 2011 income statement for Foxtrot Co., it would report income from discontinued operations of:
A. $9.2 million.
B. $13.2 million.
C. $22 million.
D. $26 million.

60% (i.e., 1 - tax rate) x $22 million ($32 million gain on asset sale - $10 million operating loss)

AACSB: Analytic
Bloom's: Synthesis
Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
Level of Learning: Hard

43. Suppose that the Footwear Division's assets had not been sold by December 31, 2011, but were considered held for sale. Assume that the fair value of these assets at December 31 was $40 million. In the 2011 income statement for Foxtrot Co., it would report a loss from discontinued operations of:
A. $3 million loss
B. $10 million loss
C. $10.8 million loss
D. $18 million loss

60% (i.e., 1 - tax rate) x $18 million loss ($8 million impairment loss on Footwear's assets + $10 million operating loss = $18 million pretax loss).

AACSB: Analytic
Bloom's: Synthesis
Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
Level of Learning: Hard

44. Suppose that the Footwear Division's assets had not been sold by December 31, 2011, but were considered held for sale. Assume that the fair value of these assets at December 31 was $80 million. In the 2011 income statement for Foxtrot Co., under discontinued operations it would report a:
A. $6 million loss
B. $10 million loss
C. $13.2 million income
D. None of the above is correct.

60% of the $10 million operating loss. There is no impairment of assets and only impairments are included if the assets are still held for sale.

AACSB: Analytic
Bloom's: Synthesis
Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
Level of Learning: Hard

45. An extraordinary event for financial reporting purposes is both:
A. Unusual and material.
B. Infrequent and significant.
C. Material and infrequent.
D. Unusual and infrequent.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Level of Learning: Easy

46. Major Co. reported 2011 income of $300,000 from continuing operations before income taxes and a before-tax extraordinary loss of $80,000. All income is subject to a 30% tax rate. In the 2011 income statement, Major Co. would show the following line-item amounts for income tax expense and net income:
A. $66,000 and $210,000.
B. $90,000 and $154,000.
C. $90,000 and $276,000.
D. $66,000 and $220,000.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Level of Learning: Medium

47. Howard Co.'s 2011 income from continuing operations before income taxes was $280,000. Howard Co. reported a before-tax extraordinary gain of $50,000. All tax items are subject to a 40% tax rate. In its income statement for 2011, Howard Co. would show the following line-item amounts for net income and income tax expense:
A. $198,000 and $112,000.
B. $230,000 and $92,000.
C. $330,000 and $132,000.
D. $198,000 and $79,000.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Level of Learning: Medium

Misty Company reported the following before-tax items during the current year: [pic]
Misty's effective tax rate is 40%.

48. What would be Misty's income before extraordinary item(s)?
A. $198.
B. $210.
C. $330.
D. $360.

($600 - 250 - 20) x (1 - .4) = $198

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Level of Learning: Hard

49. What would be Misty's net income for the current year?
A. $148.
B. $168.
C. $112.
D. None of the amounts given is correct.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Level of Learning: Hard

50. Cal's Cookies reported 2011 before-tax income before extraordinary items of $152,000 and a before-tax extraordinary loss of $32,000. All tax items are subject to a 30% tax rate. In its 2011 income statement, Cal's would report the following amounts as separate line items for net income and income tax expense:
A. $120,000 and $36,000.
B. $84,000 and $45,600.
C. $84,000 and $36,000.
D. $120,000 and $45,600.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Level of Learning: Hard

51. A voluntary change in accounting principle is accounted for by:
A. A cumulative effect on income in the year of the change.
B. A retrospective reporting of all comparative financial statements shown.
C. A prior period adjustment.
D. A separate line component of income.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-06 Describe the measurement and reporting requirements for a change in accounting principle.
Level of Learning: Easy

52. A change in depreciation method is accounted for:
A. Retrospectively.
B. As a cumulative adjustment to income in the year of change.
C. Prospectively, like changes in accounting estimates.
D. None of the above.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-06 Describe the measurement and reporting requirements for a change in accounting principle.
Level of Learning: Easy

53. On June 1, 2011, Romano Inc. changed the estimated useful life of its office equipment from 20 to 12 years. This change would be accounted for:
A. Prospectively.
B. Retrospectively.
C. As an accounting error.
D. None of the above.

AACSB: Reflective thinking
Bloom's: Synthesis
Learning Objective: 04-06 Describe the measurement and reporting requirements for a change in accounting principle.
Level of Learning: Easy

54. The financial statement presentation of a change in depreciation method is most similar to that of reporting:
A. Changes in accounting estimates.
B. Prior period adjustments.
C. Correction of errors.
D. Extraordinary items.

AACSB: Reflective thinking
Bloom's: Comprehension
Learning Objective: 04-06 Describe the measurement and reporting requirements for a change in accounting principle.
Level of Learning: Easy

55. Jack's Fireworks, which was established in 2009, changed its method of accounting for inventories from the average cost method to the first-in, first-out (FIFO) method in 2011. Cost of goods sold for the periods 2009-2011 under FIFO and the average cost method were: [pic]
Jack's Fireworks is subject to a 30% income tax rate. In its income statement for the year ended December 31, 2011, Jack's would report the cumulative effect of a change in accounting principle, net of income taxes, of: [pic]
A. Option a
B. Option b
C. Option c
D. Option d

GAAP no longer requires inclusion of cumulative effects for such changes.

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-06 Describe the measurement and reporting requirements for a change in accounting principle.
Level of Learning: Hard

56. Changes in accounting estimates are reported:
A. Currently and prospectively.
B. Retroactively and currently.
C. Retroactively, currently, and prospectively.
D. By restating prior years.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-07 Explain the accounting treatments of changes in estimates and correction of errors.
Level of Learning: Easy

57. In its December 31, 2011 financial statements, E-Z Prices estimated that losses on its current receivables would be $10.2 million. During 2012, E-Z Prices determined that the losses on the Dec. 31, 2011, receivables were actually $12.4 million. Ignoring taxes, E-Z Prices would report, in its 2012 financial statements, the additional $2.2 million loss on receivables as:
A. An extraordinary item.
B. A prior period adjustment.
C. A retroactive adjustment.
D. A current year's expense.

AACSB: Analytic
Bloom's: Analysis
Learning Objective: 04-07 Explain the accounting treatments of changes in estimates and correction of errors.
Level of Learning: Medium

58. The financial statement presentation of a change in reporting entity is most similar to the reporting of a:
A. Change in accounting principle.
B. Change in accounting estimate.
C. Discontinued business operation.
D. Correction of a material error discovered after the year the error was made.

AACSB: Reflective thinking
Bloom's: Comprehension
Learning Objective: 04-07 Explain the accounting treatments of changes in estimates and correction of errors.
Level of Learning: Medium

59. If Company A acquires Company B, required financial statement disclosures include all of the following except:
A. The effect of the change on net income.
B. The effect of the change on market share.
C. The effect of the change on income before extraordinary items.
D. The per share effects of the change.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-07 Explain the accounting treatments of changes in estimates and correction of errors.
Level of Learning: Medium

60. Harley Davis Inc. started its unicycle manufacturing business in 2009 and acquired $600,000 of equipment at the beginning of 2009. It decided to use the double-declining balance (DDB) depreciation on its equipment with no residual value and a 10-year useful life. In 2011 it changed to the straight-line depreciation method. Depreciation computed for 2009-2010 is presented below: [pic]
In 2011, Harley Davis would report depreciation of:
A. $96,000.
B. $38,400.
C. $60,000.
D. $48,000.

The depreciation for 2011 is computed prospectively, as follows:
[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-07 Explain the accounting treatments of changes in estimates and correction of errors.
Level of Learning: Hard

61. Elmore Co. purchased an offset press on January 1, 2008, at a cost of $120,000. The press had an estimated eight-year life with no residual value. Elmore uses straight-line depreciation. At January 1, 2011, Elmore estimated that the press would have only three more years of remaining life with no residual value. For 2011, Elmore would report depreciation of:
A. $25,000.
B. $15,000.
C. $20,000.
D. $30,000.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-07 Explain the accounting treatments of changes in estimates and correction of errors.
Level of Learning: Hard

62. Pablo purchased a lathe on January 1, 2009, at a cost of $45,000. At the time of purchase, the lathe was expected to have a five-year economic life and a residual value of $3,000. Pablo uses straight-line depreciation. At the beginning of 2011, Pablo estimated the lathe to have a remaining life of four years with no residual value. For the year ended December 31, 2011, Pablo would report depreciation of:
A. $7,500.
B. $7,050.
C. $7,000.
D. $6,750.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-07 Explain the accounting treatments of changes in estimates and correction of errors.
Level of Learning: Hard

63. Cendant Corporation's results for the year ended December 31, 2011, include the following material items: [pic]
Cendant Corporation's income from continuing operations before income taxes for 2011 is:
A. $900,000.
B. $880,000.
C. $820,000.
D. $320,000.

$6,200,000 - 3,800,000 - 1,300,000 - 200,000 - 80,000 = $820,000

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-03 Discuss the components of operating and nonoperating income and their relationship to earnings quality.
Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Learning Objective: 04-07 Explain the accounting treatments of changes in estimates and correction of errors.
Level of Learning: Hard

64. Which of the following is not true about EPS?
A. It must be reported by all corporations whose stock is publicly traded.
B. It must be reported separately for discontinued operations.
C. It must be reported separately for extraordinary items.
D. It must be reported on operating income.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-08 Define earnings per share (EPS) and explain required disclosures of EPS for certain income statement components.
Level of Learning: Easy

65. The Maytag Corporation's income statement includes income from continuing operations, a loss from discontinued operations, and extraordinary items. Earnings per share information would be provided for:
A. Net income only.
B. Income from continuing operations and net income only.
C. Income from continuing operations, loss from discontinued operations and net income only.
D. Income from continuing operations, loss from discontinued operations, extraordinary items and net income.

AACSB: Reflective thinking
Bloom's: Synthesis
Learning Objective: 04-08 Define earnings per share (EPS) and explain required disclosures of EPS for certain income statement components.
Level of Learning: Medium

66. Each of the following would be reported as items of other comprehensive income except:
A. Foreign currency translation gains.
B. Unrealized gains on investments accounted for as securities available for sale.
C. Deferred gains from derivatives.
D. Gains from the sale of equipment.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-09 Explain the difference between net income and comprehensive income and how we report components of the difference.
Level of Learning: Easy

67. Reporting comprehensive income in the United States can be accomplished by which of the following methods:
A. In the statement of shareholders' equity.
B. A combined statement of income and comprehensive income.
C. A separate statement of comprehensive income.
D. All of the above are acceptable methods.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-09 Explain the difference between net income and comprehensive income and how we report components of the difference.
Level of Learning: Easy

68. Reporting comprehensive income according to International Financial Reporting Standards can be accomplished by each of the following methods except:
A. In the statement of shareholders' equity.
B. A combined statement of income and comprehensive income.
C. A separate statement of comprehensive income.
D. The entity may choose either (b) or (c).

AACSB: Diversity
Bloom's: Knowledge
Learning Objective: 04-09 Explain the difference between net income and comprehensive income and how we report components of the difference.
Learning Objective: 04-12 Discuss the primary differences between U.S. GAAP and IFRS with respect to the income statement and statement of cash flows.
Level of Learning: Easy

69. Comprehensive income is the change in equity from:
A. Owner transactions.
B. Nonowner transactions.
C. Owner or nonowner transactions.
D. Capital transactions.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-09 Explain the difference between net income and comprehensive income and how we report components of the difference.
Level of Learning: Easy

70. Reconciliation between net income and comprehensive income would include:
A. Unrealized losses but not unrealized gains on available for sale securities.
B. Unrealized gains but not unrealized losses on available for sale securities.
C. Unrealized losses and unrealized gains on available for sale securities.
D. Neither unrealized losses nor unrealized gains on available for sale securities.

AACSB: Reflective thinking
Bloom's: Comprehension
Learning Objective: 04-09 Explain the difference between net income and comprehensive income and how we report components of the difference.
Level of Learning: Medium

71. Change statements include a:
A. Retained earnings statement, a balance sheet, and a cash flow statement.
B. Balance sheet, a cash flow statement, and an income statement.
C. Cash flow statement, an income statement, and a retained earnings statement.
D. Retained earnings statement, a balance sheet, and an income statement.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-10 Describe the purpose of the statement of cash flows.
Level of Learning: Easy

72. In comparing the direct method with the indirect method of preparing the statement of cash flows:
A. Only operating activities are presented differently.
B. Only investing activities are presented differently.
C. Only financing activities are presented differently.
D. All activities are presented differently.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Easy

73. The statement of cash flows reports cash flows from the activities of:
A. Operating, purchasing, and investing.
B. Borrowing, paying, and investing.
C. Financing, investing, and operating.
D. Using, investing, and financing.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Easy

74. Operating cash flows would exclude:
A. Interest received.
B. Interest paid.
C. Dividends paid.
D. Dividends received.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Medium

75. Operating cash outflows would include:
A. Purchase of investments.
B. Purchase of equipment.
C. Payment of cash dividends.
D. Purchases of inventory.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Easy

76. Cash flows from investing do not include cash flows from:
A. Lending money to another corporation.
B. The sale of equipment.
C. Borrowing.
D. The purchase of other corporation's securities.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Easy

77. Cash flows from financing activities include:
A. Interest received.
B. Interest paid.
C. Dividends received.
D. Dividends paid.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Medium

78. Cash flows from investing activities do not include:
A. Proceeds from issuing bonds.
B. Payment for the purchase of equipment.
C. Proceeds from the sale of marketable securities.
D. Cash outflows from acquiring land.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Medium

79. The FASB's stated preference for reporting operating cash flows is the:
A. Indirect method.
B. Direct method.
C. Working capital method.
D. All financial resources method.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Medium

80. In the operating activities section of the statement of cash flows, we start with net income:
A. In the direct method.
B. In the indirect method.
C. In both the direct and the indirect methods.
D. In neither the direct nor the indirect methods.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Easy

81. Which of the following is added to net income as an adjustment under the indirect method of preparing the statement of cash flows?
A. Salaries payable decrease.
B. Gain on the sale of land.
C. Loss on the sale of equipment.
D. Accounts receivable increase.

AACSB: Reflective thinking
Bloom's: Synthesis
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Medium

82. Schneider Inc. had salaries payable of $60,000 and $90,000 at the end of 2010 and 2011, respectively. During 2011, Schneider recorded $620,000 in salaries expense in its income statement. Cash outflows for salaries in 2011 were:
A. $590,000.
B. $620,000.
C. $650,000.
D. $530,000.

$620,000 - $30,000 increase in salaries payable = $590,000.

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Medium

83. Tropical Tours reported revenue of $400,000 for its year ended December 31, 2011. Accounts receivable at December 31, 2010 and 2011, were $35,000 and $32,000, respectively. Using the direct method for reporting cash flows from operating activities, Tropical Tours would report cash collected from customers of:
A. $400,000.
B. $397,000.
C. $403,000.
D. $365,000.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Medium

84. Shively Mfg. Co. sold for $18,000 equipment that cost $40,000 and had a book value of $30,000. Shively would report:
A. Operating cash inflows of $18,000.
B. Operating cash inflows of $8,000.
C. Financing cash inflows of $18,000.
D. Investing cash inflows of $18,000.

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Medium

85. Arrow Printers paid $2,000 interest on short-term notes payable, $10,000 interest on long-term bonds, and $6,000 in dividends on its common stock. Arrow would report cash outflows from activities, as follows:
A. Operating, $2,000; financing $16,000.
B. Operating, $0; financing $18,000.
C. Operating, $12,000; financing $6,000.
D. Operating, $18,000; financing $0.

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Medium

86. Hong Kong Clothiers reported revenue of $5,000,000 for its year ended December 31, 2011. Accounts receivable at December 31, 2010 and 2011, were $320,000 and $355,000, respectively. Using the direct method for reporting cash flows from operating activities, Hong Kong Clothiers would report cash collected from customers of:
A. $4,965,000.
B. $5,000,000.
C. $5,035,000.
D. $5,045,000.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Hard

87. Lucia Ltd. reported net income of $135,000 for the year ended December 31, 2011. January 1 balances in accounts receivable and accounts payable were $29,000 and $26,000 respectively. Year-end balances in these accounts were $30,000 and $24,000, respectively. Assuming that all relevant information has been presented, Lucia's cash flows from operating activities would be:
A. $132,000.
B. $134,000.
C. $136,000.
D. $138,000.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Hard

88. Shady Lane's income tax payable account decreased from $14 million to $12 million during 2011. If its income tax expense was $80 million, what would be shown as an operating cash flow under the direct method?
A. A cash outflow of $12 million.
B. A cash outflow of $78 million.
C. A cash outflow of $80 million.
D. A cash outflow of $82 million.

Income taxes payable: $14 million + 80 million - X = $12 million. X = $82 million.

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Hard

89. Bird Brain Co. reported net income of $45,000 for the year ended December 31, 2011. January 1 balances in accounts receivable and accounts payable were $23,000 and $26,000 respectively. Year-end balances in these accounts were $22,000 and $28,000, respectively. Assuming that all relevant information has been presented, Bird Brain's cash flows from operating activities would be:
A. $48,000.
B. $44,000.
C. $46,000.
D. $45,000.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Hard

90. Nevada Boot Co. reported net income of $216,000 for its year ended December 31, 2011. Purchases totaled $152,000. Accounts payable balances at the beginning and end of the year were $36,000 and $33,000, respectively. Beginning and ending inventory balances were $44,000 and $46,000, respectively. Assuming that all relevant information has been presented, Nevada Boot would report operating cash flows of:
A. $155,000.
B. $221,000.
C. $211,000.
D. $151,000.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Hard

Rowdy's Restaurants Cash Flow (in millions) [pic]

91. Rowdy's would report net cash inflows (outflows) from operating activities in the amount of:
A. $(80).
B. $120.
C. $200.
D. $420.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Hard

92. Rowdy's would report net cash inflows (outflows) from investing activities in the amount of:
A. $(4,000).
B. $100.
C. $(3,900).
D. $(1,900).

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Hard

93. Rowdy's would report net cash inflows (outflows) from financing activities in the amount of:
A. $1,100.
B. $(1,100).
C. $820.
D. $900.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Hard

94. Expenses in an income statement prepared under International Financial Reporting Standards:
A. Must be classified by function.
B. Must be classified by natural description.
C. Can be classified either by function or by natural description.
D. None of the above is correct.

AACSB: Reflective thinking, Diversity
Bloom's: Knowledge
Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components.
Learning Objective: 04-12 Discuss the primary differences between U.S. GAAP and IFRS with respect to the income statement and statement of cash flows.
Level of Learning: Easy

95. In a statement of cash flows prepared under International Financial Reporting Standards, each of the following items is typically classified as a financing cash flow except:
A. Interest paid.
B. Dividends paid.
C. Proceeds from the issuance of long-term debt.
D. Dividends received.

AACSB: Reflective thinking, Diversity
Bloom's: Comprehension
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Learning Objective: 04-12 Discuss the primary differences between U.S. GAAP and IFRS with respect to the income statement and statement of cash flows.
Level of Learning: Easy

96. Jacobsen Corporation prepares its financial statement applying U.S. GAAP. During its 2011 fiscal year, the company reported before-tax income of $620,000. This amount does not include the following two items, both of which are considered to be material in amount: [pic]
The company's income tax rate is 40%. In its 2011 income statement, Jacobsen would report income from continuing operations of:
A. $312,000.
B. $372,000.
C. $492,000.
D. $620,000.

$620,000 x (1-.40) = $372,000. Both of the additional items are reported below income from continuing operations.

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Level of Learning: Hard

97. Jacobsen Corporation prepares its financial statement applying International Financial Reporting Standards. During its 2011 fiscal year, the company reported before-tax income of $620,000. This amount does not include the following two items, both of which are considered to be material in amount: [pic]
The company's income tax rate is 40%. In its 2011 income statement, Jacobsen would report income from continuing operations of:
A. $312,000.
B. $372,000.
C. $492,000.
D. $620,000.

$620,000 + 200,000 = $820,000 x (1-.40) = $492,000. Under IFRS, there are no extraordinary items. The $200,000 gain is included in income from continuing operations.

AACSB: Analytic, Diversity
Bloom's: Application
Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Learning Objective: 04-12 Discuss the primary differences between U.S. GAAP and IFRS with respect to the income statement and statement of cash flows.
Level of Learning: Hard

Essay Questions

On September 1, 2011, Jacob Furniture Mart enters into a tentative agreement to sell the assets of its office equipment division. This division qualifies as a component of the entity according to GAAP regarding discontinued operations. The division's contribution to Jacob's operating income for 2011 was a $3 million loss before taxes. Jacob has an average tax rate of 30%.
Required: Consider independently the appropriate accounting by Jacob under the three scenarios below.

98. Scenario 1: Assume that Jacob sold the division's assets on December 31, 2011, for $24 million. The book value of the division's assets was $19 million at that date. Under these assumptions, what would Jacob report in its 2011 income statement regarding the office equipment division? Explain where this information would be presented.

Scenario 1: Jacob would report $1.4 million ($3,000,000 - $5,000,000 gain = $2,000,000. $2,000,000 net of $600,000 in taxes = $1,400,000) as income from discontinued operations. This income would be reported as a separate item between income from continuing operations and net income in Jacob's income statement.

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
Level of Learning: Hard

99. Scenario 2: Assume that Jacob had not yet sold the division's assets by the end of 2011. Further, assume that the fair value less costs to sell of the division's assets at 12/31/11 was $24 million and was expected to remain the same when the assets are sold in 2012. The book value of the division's assets was $19 million at the end of the year. Under these assumptions, what would Jacob report in its 2011 income statement regarding the office equipment division? Explain where this information would be presented.

Scenario 2: Jacob would report $2.1 million loss ($3,000,000 operating loss net of $900,000 in tax benefit) from discontinued operations. This loss would be reported as a separate item between income from continuing operations and net income in Jacob's income statement. The gain on sale of the division's assets would not be recorded until realized in 2012.

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
Level of Learning: Hard

100. Scenario 3: Assume that Jacob had not yet sold the office furniture division by the end of 2011. Further, assume that the fair value less costs to sell of the division's assets at 12/31/11 was $12 million and was expected to remain the same when the assets are sold in 2012. The book value of the division's assets was $19 million at the end of the year. Under these assumptions, what would Jacob report in its 2011 income statement regarding the office equipment division? Explain where this information would be presented.

Scenario 3: Jacob would report a $7.0 million loss ($3,000,000 operating loss + $7,000,000 impairment loss = $10,000,000. $10,000,000 net of $3.0 million in tax benefit = $7,000,000) from discontinued operations. The loss represents the total of the pre-disposal loss from operating the division ($3 million) and the impairment of the division's assets ($7 million) that will be sold in 2012. This $7.0 million net-of-tax loss ($10 million x [1-.30]) would be reported as a separate item between income from continuing operations and net income in Jacob's income statement.

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
Level of Learning: Hard

101. Canton Corporation reported the following items in its adjusted trial balance for the year ended December 31, 2011: [pic]
Required: Prepare the December 31, 2011, income statement for Canton Corporation, starting with income from continuing operations before income taxes.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Level of Learning: Hard

102. Paris Company reported the following items in its December 31, 2011, year-end adjusted trial balance: [pic]
Required: Prepare the December 31, 2011, income statement for Paris Company starting with income from continuing operations before income taxes.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Level of Learning: Hard

103. Worthington Inc. began operations January 1, 2010. In 2012 it changed its method of accounting for inventories from the average cost method to first-in, first-out (FIFO). If ending inventory had been determined under each of these two methods for both years, the results would have been: [pic]
The company's income for 2011 and 2010 under average cost was $83,500 and $78,600, respectively. The income tax rate for Worthington is 30%.
Required: Determine restated net income for Worthington Inc. for 2011 and 2010, after retrospectively applying the change in accounting principle.

[pic]

AACSB: Analytic
Bloom's: Synthesis
Learning Objective: 04-06 Describe the measurement and reporting requirements for a change in accounting principle.
Level of Learning: Hard

104. Luke Corporation began operations January 1, 2010, purchasing equipment for $200,000. The equipment is estimated to have a five year useful life with no residual value. In 2012, Luke changed its method of depreciating equipment from double-declining balance to straight-line. If depreciation expense had been computed under each of these two methods for 2010-2011, the results would have been: [pic]
Required: Compute the depreciation expense that Luke would report for 2012.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-06 Describe the measurement and reporting requirements for a change in accounting principle.
Level of Learning: Hard

105. Aggie Co. purchased equipment on January 1, 2006, at a cost of $650,000. The asset was estimated to have a 12-year life with a residual value of $50,000. Aggie uses straight-line depreciation. In 2011, Aggie revised its total estimated life to 10 years, with no residual value.
Required: Prepare journal entries to record Aggie's depreciation expense for 2010 and 2011. Show computations.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-07 Explain the accounting treatments of changes in estimates and correction of errors.
Level of Learning: Hard

106. Early in January 2011, the internal auditors for Arkansas Inc. discovered these errors and omissions in their review of the 2010 financial records. Arkansas Inc. has not yet closed its books for 2010.
1. A $1,600 sale made to Ed's Automotive in December, 2010 was incorrectly charged to the account of Ed's Upholstery.
2. A $21,000 premium for a one-year fire and extended coverage insurance policy covering the policy period May 1, 2010 to April 30, 2011, was initially recorded as expense and has not been adjusted.
3. The December 31, 2009, balance of accounts receivable was materially overstated by $18,000 as a result of an error.
Required: Prepare any necessary entries required for the above items. Ignore income taxes.

[pic]

AACSB: Analytic
Bloom's: Analysis
Learning Objective: 04-07 Explain the accounting treatments of changes in estimates and correction of errors.
Level of Learning: Hard

107. The internal auditors for Rockford Products discovered early in 2011 these errors and omissions in their review of the 2010 financial records. The 2010 financial statements have already been issued.
1. A material liability for salaries of $13,000 at December 31, 2010, was not recorded. The salaries were charged to salary expense when paid.
2. Equipment costing $5,500 was purchased without first securing a competitive bid, in violation of company policy.
3. Prior year's depreciation expense was materially understated by $13,500 due to a computation error.
Required: Prepare any necessary journal entries required as a result of the findings of the internal auditors. Ignore income tax effects.

[pic]

AACSB: Analytic
Bloom's: Analysis
Learning Objective: 04-07 Explain the accounting treatments of changes in estimates and correction of errors.
Level of Learning: Hard

[pic]
Plano had 50,000 shares of stock outstanding throughout the year. Income tax expense has not yet been accrued. The effective tax rate is 30%.

108. Required: Prepare a single-step income statement with basic earnings per share disclosure.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components.
Learning Objective: 04-08 Define earnings per share (EPS) and explain required disclosures of EPS for certain income statement components.
Level of Learning: Hard

109. Required: Prepare a multiple-step income statement with earnings per share disclosure.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components.
Learning Objective: 04-08 Define earnings per share (EPS) and explain required disclosures of EPS for certain income statement components.
Level of Learning: Hard

110. The following income statement items appeared on the adjusted trial balance of Foxworthy Corporation for the year ended December 31, 2011 ($ in 000s): sales revenue, $22,300; cost of goods sold, $14,500; selling expenses, $2,300; general and administrative expenses, $1,200; dividend revenue from investments, $200; interest expense, $300. Income taxes have not yet been accrued. The company's income tax rate is 40% on all items of income or loss. These revenue and expense items appear in the company's income statement every year. The company's controller, however, has asked for your help in determining the appropriate treatment of the following nonrecurring transactions that also occurred during 2011 ($ in 000s). All transactions are material in amount.
1. Investments were sold during the year at a loss of $300. Foxworthy also had unrealized losses of $200 for the year on investments accounted for as securities available for sale.
2. One of the company's factories was closed during the year. Restructuring costs incurred were $2,000.
3. One of Foxworthy's manufacturing facilities located in a foreign country was expropriated. A loss of $800 was recognized. The event is considered to be unusual and infrequent.
4. During the year, Foxworthy completed the sale of one of its operating divisions that qualifies as a component of the entity according to GAAP regarding discontinued operations. The division had incurred operating income of $800 in 2011 prior to the sale, and its assets were sold at a loss of $1,800.
5. In 2011, the company's accountant discovered that depreciation expense in 2010 for the office building was overstated by $300.
6. Foreign currency translation gains for the year totaled $600.
Required: Prepare Foxworthy's combined statement of income and comprehensive income for 2011, including basic earnings per share disclosures. Two million shares of common stock were outstanding throughout the year.

[pic]
Note: The depreciation expense error is a prior period adjustment (to retained earnings) and is not reported in the income statement.

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components.
Learning Objective: 04-03 Discuss the components of operating and nonoperating income and their relationship to earnings quality.
Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Learning Objective: 04-07 Explain the accounting treatments of changes in estimates and correction of errors.
Learning Objective: 04-08 Define earnings per share (EPS) and explain required disclosures of EPS for certain income statement components.
Learning Objective: 04-09 Explain the difference between net income and comprehensive income and how we report components of the difference.
Level of Learning: Hard

The trial balance of Lakewood Inc. included the following accounts as of December 31, 2011: [pic]
Lakewood Inc. had 100,000 shares of stock outstanding throughout the year. Income tax expense has not yet been accrued. The effective tax rate is 30%.

111. Required: Prepare a single-step income statement with basic earnings per share disclosure.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components.
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Learning Objective: 04-08 Define earnings per share (EPS) and explain required disclosures of EPS for certain income statement components.
Level of Learning: Hard

112. Required: Prepare a multiple-step income statement with earnings per share disclosure.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components.
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Learning Objective: 04-08 Define earnings per share (EPS) and explain required disclosures of EPS for certain income statement components.
Level of Learning: Hard

113. Calstone, Inc. prepares an annual combined statement of income and comprehensive income. The following situations occurred during the company's 2011 fiscal year:
1. An earthquake destroyed a manufacturing facility. The event is considered to be unusual and infrequent in occurrence.
2. Land that had been held as an investment was sold and a gain was recognized.
3. Losses from foreign currency translation were recognized.
4. Interest revenue was recognized.
5. A division was sold that qualifies as a separate component according to GAAP regarding discontinued operations.
6. Unrealized losses on investments accounted for as securities available for sale were recorded.
7. The controller discovered an error in the calculation of 2010's revenue.
8. Restructuring costs were incurred due to downsizing and reorganization of a manufacturing facility.
Required:
For each situation, identify the appropriate reporting treatment from the list below (consider each event to be material).
a. As a component of operating income.
b. As a nonoperating income item (other income or expense).
c. As a separately reported item.
d. As an item of other comprehensive income.
e. As an adjustment to retained earnings.

1. c. As a separately reported item.
2. b. As a nonoperating income item.
3. d. As an other comprehensive income item.
4. b. As a nonoperating income item.
5. c. As a separately reported item.
6. d. As an other comprehensive income item.
7. e. As an adjustment to retained earnings.
8. a. As a component of operating income.

AACSB: Analytic
Bloom's: Comprehension
Learning Objective: 04-03 Discuss the components of operating and nonoperating income and their relationship to earnings quality.
Learning Objective: 04-04 Define what constitutes discontinued operations and describe the appropriate income statement presentation for these transactions.
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Learning Objective: 04-07 Explain the accounting treatments of changes in estimates and correction of errors.
Learning Objective: 04-09 Explain the difference between net income and comprehensive income and how we report components of the difference.
Level of Learning: Medium

114. The following information is for Redwood Inc. for the year ended December 31, 2011. Redwood had a cash and cash equivalents balance of $5,200 on January 1, 2011. [pic]
Required: Prepare a statement of cash flows for the year using the direct method for operating activities.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Hard

115. The chief accountant for Julius Co. provides you with the company's most recent income statement and comparative balance sheets below. The accountant has asked for your help in preparing part of the company's 2011 statement of cash flows. [pic]
Required: In the space provided below, determine the cash flow from operating activities for Julius Co., using the direct method.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Hard

116. The accounting records of Rockness Company provided the data below ($ in 000s). [pic]
Required: Prepare a reconciliation of net income to net cash flows from operating activities.

[pic]

AACSB: Analytic
Bloom's: Application
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Hard

117. Cahill & Sons earned before -tax income of $450,000 for its 2011 fiscal year. During the year the company experienced a $310,000 loss resulting from the expropriation of assets in a foreign country. The amount of the loss is material and the event is considered to be unusual and infrequent. The loss is not included in the $450,000 income figure. The company's income tax rate is 30%.
Required: 1. Prepare a partial 2011 income statement for Cahill starting with income before tax and any separately reported items.
2. Repeat requirement 1 assuming that Cahill prepares its financial statements according to International Financial Reporting Standards.

[pic]

[pic]

AACSB: Analytic, Diversity
Bloom's: Application
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Learning Objective: 04-12 Discuss the primary differences between U.S. GAAP and IFRS with respect to the income statement and statement of cash flows.
Level of Learning: Hard

118. The statement of cash flows for the year ended December 31, 2011 for Whiteside Incorporated is presented below. [pic]
Required: Prepare the statement of cash flows assuming that Whiteside prepares its financial statements according to International Financial Reporting Standards. Where IFRS allows flexibility, use the classification used most often in IFRS financial statements.

[pic]

AACSB: Analytic, Diversity
Bloom's: Application
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Learning Objective: 04-12 Discuss the primary differences between U.S. GAAP and IFRS with respect to the income statement and statement of cash flows.
Level of Learning: Hard

Instructions: The following answers to essay questions point out the key phrases that should appear in students' answers. They are not intended to be examples of complete student responses. It would be helpful to provide instructions to students on how brief or in-depth you would like their answers to be.

119. Briefly explain when and why intraperiod tax allocation is necessary.

Intraperiod tax allocation associates income tax expense with each component of income that causes it. It is required when there are separately reported items (discontinued operations or extraordinary items).

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components.
Level of Learning: Medium

120. Briefly explain why the income statement is referred to as a change statement.

The income statement is one of three primary financial statements that is a change statement. That is, it reports on activities over a distinct period of time that caused some element or elements of financial position to change. Specifically, the income statement reports periodic revenues, gains, expenses, and losses, that is, changes in the retained earnings component of shareholders' equity. A year is the longest period of time reported. Statements covering periods of less than a year are referred to as interim statements.

AACSB: Reflective thinking
Bloom's: Comprehension
Learning Objective: 04-01 Discuss the importance of income from continuing operations and describe its components.
Level of Learning: Medium

121. Net income, often referred to as "the bottom line," is not always a good predictor of future income. Explain this statement.

Net income is of low quality when there items like discontinued operations or extraordinary items present. Income from continuing operations becomes more important, when these items are present. Material items included in continuing operations, such as restructuring charges, may make income from continuing operations fuzzy (in terms of its relation to future profitability) as well.

AACSB: Reflective thinking
Bloom's: Comprehension
Learning Objective: 04-02 Describe earnings quality and how it is impacted by management practices to manipulate earnings.
Level of Learning: Medium

122. Explain, using an example, how a company can use earnings management and justify it by conservatism.

In order to comply with accrual accounting, companies must estimate various items that impact income. For example, the use of allowances for such items such as bad debts, and warranties requires professional judgment for estimating appropriate amounts that will affect both the income statement and the balance sheet. These allowances are reviewed each period to make further adjustments to the respective allowance account. If a company was having a very good performance year and anticipated a more difficult year in the future, it might create a larger than usual allowance adjustment (expense) in the current year, justifying it by conservatism, that could lead to taking a smaller adjustment (expense) in a later period. By doing so, current income would be pushed into the future, thereby shifting earnings.

AACSB: Reflective thinking
Bloom's: Synthesis
Learning Objective: 04-02 Describe earnings quality and how it is impacted by management practices to manipulate earnings.
Level of Learning: Hard

123. In a recent press release, Foot Locker Inc. reported that its fiscal first-quarter net income fell 46% due to losses related to discontinued operations, but earnings from continuing operations jumped 19% amid a modest increase in sales. The specialty athletic retailer said net was $20 million for the quarter ended May 4, compared with net of $37 million a year earlier. The latest results included a loss of $18 million from discontinued operations. Last year, the company had earnings of $5 million, or four cents a share, from discontinued operations. Foot Locker said earnings from continuing operations were $38 million, compared with $32 million a year earlier. Discuss how Foot Locker's press release relates to its earnings quality.

Separating the reported loss on the discontinued component of its operations allows users to assess the permanent (going forward) component of Foot Locker's earnings. By doing so, the reader will note that the company actually improved the performance of the continuing part of its operations, thereby suggesting an upward trend in future earnings. While this may not occur, it is likely to be a better predictor of future earnings than one based on bottom line net income.

AACSB: Analytic
Bloom's: Analysis
Learning Objective: 04-02 Describe earnings quality and how it is impacted by management practices to manipulate earnings.
Level of Learning: Hard

124. In a recent press release, Estee Lauder Co. reported "a fiscal fourth-quarter loss due to a restructuring charge but said it expects to see earnings growth in its fiscal second through fourth quarters." The New York skincare and cosmetics company reported a net loss of $25.4 million, or 13 cents a share, for the quarter ended June 30, compared with net income of $20.4 million, or six cents a share, a year earlier. Excluding the restructuring charge of $76.9 million, or 32 cents a share, the company said profit would have been $51.5 million, or 19 cents a share. Discuss how Estee Lauder's press release relates to its earnings quality.

Company management is pointing out that, in their opinion, the loss from the restructuring charge is transitory and should not be considered part of permanent earnings. In addition, by taking the charge now, future earnings seem likely to be on an up trend.

AACSB: Analytic
Bloom's: Analysis
Learning Objective: 04-03 Discuss the components of operating and nonoperating income and their relationship to earnings quality.
Level of Learning: Medium

125. Briefly define extraordinary items and explain how they are reported according to U.S. GAAP.

Extraordinary items are material gains and losses that are BOTH unusual and infrequent in occurrence. Items that meet only one of the criteria are typically reported on a separate line as a component of continuing operations on the face of the income statement. Extraordinary items are reported, net of tax, after discontinued operations.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-05 Define extraordinary items and describe the appropriate income statement presentation for these transactions.
Level of Learning: Medium

126. Many income statement numbers are based on estimates. Explain the reporting required when the income effect of a change in estimate is material.

If the after-tax income effect of a change in estimate is material, the effect on net income and EPS must be disclosed in a note, along with the justification for the change. The new estimate is reflected in the financial statements for the current period and future periods.

AACSB: Reflective thinking
Bloom's: Knowledge
Learning Objective: 04-07 Explain the accounting treatments of changes in estimates and correction of errors.
Level of Learning: Medium

127. Presented below is an excerpt ($ in millions) from the 2009 annual report to shareholders of Microsoft Corporation. Explain how the shareholder should interpret the difference between the net income and total comprehensive income for Microsoft in 2009. [pic]

The $14,569 million in net income is the reported results of operations for the year, measured according to GAAP. In this measure, certain nonowner changes in equity are omitted, such as the effects of holding assets in foreign currencies that are subject to fluctuation, unrealized losses on certain marketable securities, and the effects of hedging derivative contracts. Although these events are not reported directly in the income statement, they are disclosed in the computation of comprehensive income. By disclosing them there, the company reports the entire nonowner change in equity for the year.

AACSB: Analytic
Bloom's: Comprehension
Learning Objective: 04-09 Explain the difference between net income and comprehensive income and how we report components of the difference.
Level of Learning: Hard

128. Give an example of a major investing activity cash outflow that would be reported in the statement of cash flows for a manufacturing company.

Purchases of property, plant and equipment would typically be a major investing cash outflow for a manufacturing company.

AACSB: Reflective thinking
Bloom's: Synthesis
Learning Objective: 04-10 Describe the purpose of the statement of cash flows.
Level of Learning: Medium

129. List at least four operating activities that would be reported in the statement of cash flows for Wal-Mart. Assume the use of the direct method.

[pic]

AACSB: Reflective thinking
Bloom's: Application
Learning Objective: 04-10 Describe the purpose of the statement of cash flows.
Level of Learning: Hard

130. Give an example of a non-cash financing and investing activity and explain when and how it would be reported in the financial statements.

The purchase of land and building in exchange for a mortgage note would be one example of a non-cash financing and investing activity. Such activities can either be reported in a separate schedule in the statement of cash flows or reported in a disclosure note.

AACSB: Reflective thinking
Bloom's: Application
Learning Objective: 04-11 Identify and describe the various classifications of cash flows presented in a statement of cash flows.
Level of Learning: Medium

131. Briefly discuss at least two differences between income statements prepared under U.S. GAAP and IFRS.

1. International standards allow expenses to be classified either by function or by natural description. SEC regulations in the U.S. require that expenses be classified by function.
2. International standards prohibit reporting extraordinary items.
3. The bottom line of a U.S. income statement is called net income or net loss. The term used in income statements prepared under IFRS is either profit or loss.

AACSB: Reflective thinking, Diversity
Bloom's: Knowledge
Learning Objective: 04-12 Discuss the primary differences between U.S. GAAP and IFRS with respect to the income statement and statement of cash flows.
Level of Learning: Medium