Intermediate Accounting

Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield

Chapter 4 Income Statement and Related Information - all with Video Answers

Educators

Chapter Questions

Problem 1

What kinds of questions about future cash flows do investors and creditors attempt to answer with information in the income statement?

Alexander Cheng

Numerade Educator

01:17

Problem 2

How can information based on past transactions be used to predict future cash flows?

Alexander Cheng

Numerade Educator

05:46

Problem 3

Identify at least two situations in which important changes in value are not reported in the income statement.

Puneet Prajapati

Numerade Educator

01:28

Problem 4

Identify at least two situations in which application of different accounting methods or accounting estimates results in difficulties in comparing companies.

Ameer Said

Numerade Educator

03:15

Problem 5

Explain the transaction approach to measuring income. Why is the transaction approach to income measurement preferable to other ways of measuring income?

Pragya Ahuja

Numerade Educator

00:46

Problem 6

What is earnings management?

Ameer Said

Numerade Educator

00:48

Problem 7

How can earnings management affect the quality of earnings?

Kaylee Mcclellan

Numerade Educator

02:24

Why should caution be exercised in the use of the net income figure derived in an income statement? What are the objectives of generally accepted accounting principles in their application to the income statement?

Mihir Nayar

Numerade Educator

01:39

Problem 9

A Wall Street Journal article noted that MicroStrategy reported higher income than its competitors by using
a more aggressive policy for recognizing revenue on future upgrades to its products. Some contend that MicroStrategy's quality of earnings is low. What does the term "quality of earnings" mean?

Kaylee Mcclellan

Numerade Educator

00:48

Problem 10

What is the major distinction (a) between revenues and gains and (b) between expenses and losses?

Daniel Cisneros

Numerade Educator

01:30

Problem 11

What are the advantages and disadvantages of the singlestep income statement?

Kaylee Mcclellan

Numerade Educator

02:04

Problem 12

What is the basis for distinguishing between operating and nonoperating items?

Ameer Said

Numerade Educator

02:04

Problem 13

Distinguish between the modified all-inclusive income statement and the current operating performance income statement. According to present generally accepted accounting principles, which is recommended? Explain.

Ameer Said

Numerade Educator

00:03

Problem 14

How should correction of errors be reported in the financial statements?

Oluwadamilola Ameobi

Numerade Educator

01:30

Problem 15

Discuss the appropriate treatment in the financial statements of each of the following.
(a) An amount of 113,000 dollars realized in excess of the cash surrender value of an insurance policy on the life of one of the founders of the company who died during the year.
(b) A profit-sharing bonus to employees computed as a percentage of net income.(c) Additional depreciation on factory machinery because of an error in computing depreciation for the previous
year.
(d) Rent received from subletting a portion of the office
space.
(e) A patent infringement suit, brought 2 years ago against the company by another company, was settled this year by a cash payment of $\$ 725,000$
(f) A reduction in the Allowance for Doubtful Accounts balance, because the account appears to be considerably in excess of the probable loss from uncollectible receivables.

Rashmi Sinha

Numerade Educator

00:50

Problem 16

Indicate where the following items would ordinarily appear on the financial statements of Boleyn, Inc. for the year 2010 .
(a) The service life of certain equipment was changed from 8 to 5 years. If a 5 -year life had been used previously, additional depreciation of 425,000 dollars would have been charged.
(b) In 2010 a flood destroyed a warehouse that had a book value of 1,600,000 dollars. Floods are rare in this locality.
(c) In 2010 the company wrote off $\$ 1,000,000$ of inventory that was considered obsolete.(d) An income tax refund related to the 2007 tax year was received.
(e) In 2007 , a supply warehouse with an expected useful life of 7 years was erroneously expensed.
(f) Boleyn, Inc. changed from weighted-average to FIFO inventory pricing.

Rashmi Sinha

Numerade Educator

04:29

Problem 17

Indicate the section of a multiple-step income statement in which each of the following is shown.
(a) Loss on inventory write-down.
(b) Loss from strike.
(c) Bad debt expense.
(d) Loss on disposal of a component of the business.
(e) Gain on sale of machinery.
(f) Interest revenue.
(g) Depreciation expense.
(h) Material write-offs of notes receivable.

Oluwadamilola Ameobi

Numerade Educator

03:46

Problem 18

Perlman Land Development, Inc. purchased land for 70,000dollars and spent 30,000 dollars developing it. It then sold the land for $\$ 160,000 dollars . Sheehan Manufacturing purchased land for a future plant site for 100,000 dollars . Due to a change in plans, Sheehan later sold the land for 160,000 dollars. Should these two companies report the land sales, both at gains of $\$ 60,000,$ in a similar manner?

Kayleah Tsai

Numerade Educator

01:27

Problem 19

You run into Greg Norman at a party and begin discussing financial statements. Greg says, "I prefer the single-step income statement because the multiple-step format generally overstates income." How should you respond to Greg?

Aria Ye

Numerade Educator

02:01

Problem 20

Santo Corporation has eight expense accounts in its general ledger which could be classified as selling expenses. Should Santo report these eight expenses separately in its income statement or simply report one total amount for selling expenses?

Jennifer Stoner

Numerade Educator

02:55

Problem 21

Cooper Investments reported an unusual gain from the sale of certain assets in its 2010 income statement. How
does intraperiod tax allocation affect the reporting of this unusual gain?

Bobby Barnes

University of North Texas

02:16

Problem 22

What effect does intraperiod tax allocation have on reported net income?

Prabhakar Kumar

Numerade Educator

01:00

Problem 23

Neumann Company computed earnings per share as follows. $\frac{\text { Net income }}{\text { Common shares outstanding at year-end }}$.Neumann has a simple capital structure. What possible errors might the company have made in the computation? Explain.

Srikar Katta

Numerade Educator

06:55

Problem 24

Qualls Corporation reported 2010 earnings per share of $\$ 7.21 .$ In 2011 $, Qualls reported earnings per share as follows.Is the increase in earnings per share from $\$ 7.21$ to $\$ 8.28$ a favorable trend?

Chris Trentman

Numerade Educator

00:57

Problem 25

What is meant by "tax allocation within a period"? What is the justification for such practice?

Kaylee Mcclellan

Numerade Educator

01:45

Problem 26

When does tax allocation within a period become necessary? How should this allocation be handled?

Tristan Wille

Numerade Educator

02:25

Problem 27

During $2010,$ Liselotte Company earned income of $\$ 1,500,000$ before income taxes and realized a gain of $\$ 450,000$ on a government-forced condemnation sale of a division plant facility. The income is subject to income taxation at the rate of $34 \%$. The gain on the sale of the plant is taxed at $30 \% .$ Proper accounting suggests that the unusual gain be reported as an extraordinary item. Illustrate an appropriate presentation of these items in the income statement.

Riham Bassal

Numerade Educator

02:40

Problem 28

On January $30,2009,$ a suit was filed against Frazier Corporation under the Environmental Protection Act. On August $6,2010,$ Frazier Corporation agreed to settle the action and pay $\$ 920,000$ in damages to certain current and former employees. How should this settlement be reported in the 2010 financial statements? Discuss.

Victor Salazar

Numerade Educator

03:26

Problem 29

Linus Paper Company decided to close two small pulp mills in Conway, New Hampshire, and Corvallis, Oregon. Would these closings be reported in a separate section entitled "Discontinued operations after income from continuing operations"? Discuss.

Daniel Cisneros

Numerade Educator

01:55

Problem 30

What major types of items are reported in the retained earnings statement?

Jennifer Stoner

Numerade Educator

06:41

Problem 31

Generally accepted accounting principles usually require the use of accrual accounting to "fairly present" income. If the cash receipts and disbursements method of accounting will "clearly reflect" taxable income, why does this method not usually also "fairly present" income?

Puneet Prajapati

Numerade Educator

04:01

Problem 32

State some of the more serious problems encountered in seeking to achieve the ideal measurement of periodic net income. Explain what accountants do as a practical alternative.

John Coffey

Numerade Educator

01:55

Problem 33

What is meant by the terms elements and items as they relate to the income statement? Why might items have to be disclosed in the income statement?

Jennifer Stoner

Numerade Educator

01:55

Problem 34

What are the three ways that other comprehensive income may be displayed (reported)?

Jennifer Stoner

Numerade Educator

03:17

Problem 35

How should the disposal of a component of a business be disclosed in the income statement?

Kaylee Mcclellan

Numerade Educator

04:17

Problem 36

What are the iGAAP requirements with respect to expense classification?

Tommy Nguyen

Numerade Educator

01:30

Problem 37

Bradshaw Company experienced a loss that was deemed to be both unusual in nature and infrequent in occurrence. How should Bradshaw report this item in accordance with ¡GAAP?

Oluwadamilola Ameobi

Numerade Educator

02:44

Problem 38

Explain the iGAAP reporting guidelines for items recognized in comprehensive income but that do not affect net income.

Puneet Prajapati

Numerade Educator

02:25

Problem 39

Gribble Company reported the following amounts in 2010 :
Net income 150,000dollars Unrealized gain related to revaluation to buildings, 10,000 dollars . Unrealized loss related to available-for-sale securities, $\$(35,000) .$ Determine Gribble's total recognized income and expense for 2010.

Riham Bassal

Numerade Educator

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