Understanding Financial Statements

Lyn M. Fraser, Aileen Ormiston

Chapter 3 Income Statement and Statement of Stockholders' Equity - all with Video Answers

Educators

Chapter Questions

Problem 1

________ What does the income statement measure for a firm?
(a) The changes in assets and liabilities that occurred during the period.
(b) The financing and investment activities for a period.
(c) The results of operations for a period.
(d) The financial position of a firm for a period.

Jennifer Stoner

Numerade Educator

Problem 2

________ How are companies required to report total comprehensive income?
(a) On the face of the income statement.
(b) In a separate statement of comprehensive income.
(c) In its statement of stockholders' equity.
(d) All of the above.

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Problem 3

________ Which of the following items needs to be disclosed separately in the income statement?
(a) Discontinued operations.
(b) Salary expense.
(c) Warranty expense.
(d) Bad debt expense.

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Problem 4

________ What is a common-size income statement?
(a) An income statement that provides intermediate profit measures.
(b) An income statement that groups all items of revenue together, then deducts all categories of expense.
(c) A statement that expresses each item on an income statement as a percentage of net sales.
(d) An income statement that includes all changes of equity during a period.

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08:55

Problem 5

________ Which of the following statements is incorrect with regard to gross profit or gross profit margin?
(a) The gross profit margin and cost of goods sold percentage are complements of each other.
(b) Generally, firms want to maintain the relationship between gross profit and sales, or, if possible, increase gross profit margin.
(c) The gross profit margin tends to be more stable in industries such as groceries.
(d) When cost of goods sold increases, most firms do not raise prices.

Mohan Jain

Numerade Educator

Problem 6

________ Why is it important to evaluate increases and decreases in operating expenses?
(a) Increases in operating expenses may indicate inefficiencies and decreases in operating expenses may be detrimental to long-term sales growth.
(b) It is important to determine if companies are spending at least 10 cents of every sales dollar on advertising expenses.
(c) Increases in operating expenses are always an indication that a firm will increase sales in the future.
(d) None of the above.

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03:41

Problem 7

________ Which of the following assets will not be depreciated over its service life?
(a) Buildings.
(b) Furniture.
(c) Land.
(d) Equipment.

Puneet Prajapati

Numerade Educator

Problem 8

________ How are costs of assets that benefit a firm for more than one year allocated?
(a) Depreciation.
(b) Depletion and amortization.
(c) Costs are divided by service lives of assets and allocated to repairs and maintenance.
(d) Both (a) and (b).

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Problem 9

________ Why should the expenditures for repairs and maintenance correspond to the level of investment in capital equipment and to the age and condition of that equipment?
(a) Repairs and maintenance expense is calculated in the same manner as depreciation expense.
(b) Repairs and maintenance are depreciated over the remaining life of the assets involved.
(c) It is a generally accepted accounting principle that repairs and maintenance expense is generally between $5 \%$ and $10 \%$ of fixed assets.
(d) Inadequate repairs of equipment can impair the operating success of a business enterprise.

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01:41

Problem 10

________ Why is the figure for operating profit important?
(a) This is the figure used for calculating federal income tax expense.
(b) The figure for operating profit provides a basis for assessing the success of a company apart from its financing and investment activities and separate from its tax status.
(c) The operating profit figure includes all operating revenues and expenses as well as interest and taxes related to operations.
(d) The figure for operating profit provides a basis for assessing the wealth of a firm.

Jingchi Yan

Numerade Educator

Problem 11

________ Why can the equity method of accounting for investments in the voting stock of other companies cause distortions in net earnings?
(a) Significant influence may exist even if the ownership of voting stock is less than $20 \%$.
(b) Income is recognized where no cash may ever be received.
(c) Income should be recognized in accordance with the accrual method of accounting.
(d) Income is recognized only to the extent of cash dividends received.

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01:58

Problem 12

________ Why should the effective tax rate be evaluated when assessing earnings?
(a) It is important to understand if earnings have increased due to tax techniques as opposed to positive changes in core operations.
(b) Effective tax rates are irrelevant because they are mandated by law.
(c) Effective tax rates do not include the effects of foreign taxes.
(d) Net operating losses allow a firm to change its effective tax rates for each of the five years prior to the loss.

Kaylee Mcclellan

Numerade Educator

14:09

Problem 13

________ What causes a firm to record a change in accounting principle?
(a) Voluntary changes in accounting principles and changes mandated by the FASB or the SEC when new rules are implemented.
(b) Selling a segment of the business.
(c) Unusual and infrequent events.
(d) All of the above.

Puneet Prajapati

Numerade Educator

Problem 14

________ What are three profit measures calculated from the income statement?
(a) Operating profit margin, net profit margin, repairs and maintenance to fixed assets.
(b) Gross profit margin, cost of goods sold percentage, EBIT.
(c) Gross profit margin, operating profit margin, net profit margin.
(d) None of the above.

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Problem 15

________ When is a dual presentation of basic and diluted earnings per share required?
(a) When a company has pension liabilities.
(b) When convertible securities are in fact converted.
(c) When a company has a simple capital structure.
(d) When a company has a complex capital structure.

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Problem 16

________ What is a statement of stockholders' equity?
(a) It is the same as a retained earnings statement.
(b) It is a statement that reconciles only the treasury stock account.
(c) It is a statement that summarizes changes in the entire stockholders' equity section of the balance sheet.
(d) It is a statement reconciling the difference between stock issued at par value and stock issued at market value.

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Problem 17

________ What accounts can be found on a statement of stockholders' equity?
(a) Investments in other companies.
(b) Treasury stock, accumulated other comprehensive income, and retained earnings.
(c) Market value of treasury stock.
(d) Both (a) and (c).

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02:01

Problem 18

________ Which of the following cause(s) a change in the retained earnings account balance?
(a) Prior period adjustment.
(b) Payment of dividends.
(c) Net profit or loss.
(d) All of the above.

Oluwadamilola Ameobi

Numerade Educator

Problem 19

Match the following terms with the correct definitions:
________ (a) Depreciation.
________ (b) Depletion.
________ (c) Amortization.
________ (d) Gross profit.
________ (e) Operating profit.
________ (f) Net profit.
________ (g) Equity method.
________ (h) Cost method.
________ (i) Single-step format.
________ (j) Multiple-step format.
________ (k) Basic earnings per share.
________ (I) Diluted earnings per share.
________ (m) Extraordinary events.
________ (n) Discontinued operations.

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