Income Statement Other Items

Self Test

Self Test

Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.

1. Comprehensive income consists of.

a. all gains and losses only
b. net income plus other gains and losses not included in net income
c. all transactions with shareholders that change equity
d. all gains and losses except those related to derivatives

Answer
B. Net income plus other gains and losses not included in income gives comprehensive income. Comprehensive income measures all changes to equity with the exception of transactions with owners.

2. Gains and losses that are not included as part of net income are

a. recorded as part of owner’s equity
b. reported on the statement of other comprehensive income
c. never a part of comprehensive income
d. a. and b.

Answer
D. Gains and losses not included in net income are comprehensive income components. These are recorded as part of owner’s equity and reported as after net income or on a separate statement of comprehensive income.

3. Earnings quality relates to

a. the percentage that net income is increasing over the prior year
b. the ability to use the income statement to predict future earnings
c. using the same accounting principles consistently
d. the ability to compare one company to another

Answer
B. Earnings quality is directly related to the predictability of the income statement.

4. Restructuring costs must always be recorded

a. in the period they are incurred
b. in the period they are expected to occur
c. in the period the restructure is planned
d. when the cash is paid for the restructure cost

Answer
A. According to FASB 146, restructuring expenses must be reported as operating expenses in the period the costs are incurred.

5. With “discontinued operations”, an operation is defined as a component of an entity

a. that has a separate facility
b. that has operations in several different countries
c. that has clearly distinguished cash flows
d. is never a separate legal entity

Answer
C. An operation is a component of an entity with separately distinguishable cash flows.

6. The operations of a component that are discontinued will be reported separately as discontinued operations when the

a. cash flows from the operation will be eliminated in the future
b. management will not be involved in the future
c. both a. and b.
d. neither a. or b.

Answer
C. Discontinued operations is reported separately when the future cash flows will be eliminated and management will have no future involvement in operations. Both of these are required for separate reporting.

7. A discontinued operation will be reported

a. on the income statement
b. in the footnotes
c. in the cash flow statement
d. all of the above

Answer
D. Income, gains, and losses will be reported on the income statement. Cash from the sale of the operation will be reported on the cash flow statement. A description of the discontinued operation is provided in the footnotes.

8. Discontinued operations is always reported

a. after tax
b. net of tax
c. before tax
d. either a. or b.

Answer
D. Items reported below tax expense are always recorded net of tax or after tax. These terms mean the same thing; after the tax expense or tax benefit has been considered.

9. The income from discontinued operations during the period is reported when

a. the operation is sold during the period
b. the operation is held for sale during the period
c. the operation is for sale and not expected to be sold during the period
d. all of the above

Answer
D. Income from an “operation” that is held for sale or planned to be disposed of is reported separately for each period regardless of when the actual sale occurs.

10. An impairment loss related to discontinuing operations is reported when

a. the operation was sold this period
b. the period the operating component is held for sale
c. when the assets are reported at less than fair market value
d. never

Answer
B. Assets held for sale that qualify as part of discontinued operations must be tested for impairment and the impairment is reported in the period it is identified. Assets that have been sold in the period are not subject to impairment. Impairment occurs when the book value of assets is greater than fair market value.

11. A transaction is reported separately as a restructuring expense when it is

a. a plan to reduce operating expenses to improve future profits
b. a sale of a component of the business that is operating at a loss
c. an unusual loss
d. only a one-time expense

Answer
D. Restructuring expenses is a change to operations to reduce operating expenses and increase operating income. Restructuring expenses are reported as part of operating expenses before income from operations.

12. An “accounting change” occurs when

a. the company changes from one acceptable method to another
b. the company changes from an unacceptable method to an acceptable method.
c. the company changes from one unacceptable method to another
d. all of the above

Answer
A. An accounting change occurs when a change is made from one acceptable accounting method to another. A change from an unacceptable accounting method is an error.

13. A company reports a change in an accounting estimate by

a. a footnote disclosure only
b. adjusting the affected accounts in the current period
c. retroactive restatement of affected accounts
d. changing retained earnings for the affect of the change

Answer
B. Changes in estimates are reported prospectively by changing the affected accounts in the current period only. Prior periods are not restated.

14. A change in the composite of reported entities requires

a. a footnote disclosure only
b. adjusting the affected accounts in the current period only
c. retroactive restatement of affected accounts
d. changing retained earnings only for the affect of the change

Answer
C. A change in reporting entities requires all prior periods to be restated. A footnote disclosure is also required.

15. Earnings per share must be reported for

a. net income only
b. discontinued operations only
c. income from continuing operations only
d. all items reported after income tax expense

Answer
D. Earnings per share must be separately reported for all items that are reported after income from continuing operations which follows income tax expense. This includes income from continuing operations, discontinued operations, extraordinary items, and net income.