Chapter 9, Additional lssues Video Solutions, Financial Statements Demystified

Problem 1

Discontinued operations are:
a. Shown on the balance sheet as a liability
b. Shown on the balance sheet as an asset
c. Shown on the income statement as a separate item
d. Shown on the income statement but combined with other revenues and expenses

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Problem 2

Income and expenses from discontinued operations have no impact on income taxes.
a. True
b. False

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Problem 3

Extraordinary gains or losses:
a. Must be unusual and occur infrequently
b. Occur infrequently but can be a normal business activity as long as they are highly material
c. Often are listed on financial statements
d. Are shown as an asset on the balance sheet

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Problem 4

Which of the following is an example of an extraordinary item?
a. Gains or losses from discontinued operations
b. Losses suffered from the effects of a strike against the company
c. Losses suffered from abandoning business property and equipment because of damage from a major volcanic eruption that previously had not occurred in the area for over a century
d. Writing off an accounts receivable as uncollectible

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Problem 5

Changes in accounting principle:
a. Rarely occur because once management selects an accounting principle to follow, it is not allowed to change it except in extremely unusual circumstances
b. Are reflected in the current year and future years only; past financial statements are not restated
c. Require no additions or changes to the standard audit report
d. Must be disclosed by management in the financial statement footnotes, stating the nature of the change, explaining why the new method is preferable, and including the financial impact on affected accounts, income from continuing operations, and net income

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Problem 6

Which of the following is an example of a change in accounting principle?
a. Changing the service life for equipment in depreciation calculations
b. Switching from the LIFO method to the FIFO method of inventory valuation
c. Implementing the accrual basis of accounting after using the cash basis of accounting in prior years
d. Increasing the amount of bad debt expense recorded because of a downturn in the economy

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Problem 7

A change in estimate requires that prior year financial statements be restated.
a. True
b. False

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Numerade Educator

Problem 8

A change in estimate rarely occurs, as very few estimates are built into financial statements.
a. True
b. False

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Problem 9

If a company discovers that its prior year financial statements contain an error, they must be restated before they are presented again.
a. True
b. False

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Problem 10

Which of the following is an example of an error?
a. Increasing the salvage value of equipment for depreciation calculations as a result of better information
b. Inadvertently recording revenue this year when it should have been recorded in the following year
c. Intentionally understating expenses in order to be able to report a higher net income
d. Switching from one generally accepted accounting principle to another because management now believes that the new principle is preferable and will result in an improvement in financial reporting

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