Accrual Basis Income Statement
Medium Practice Test
Introduction to Accounting
Accrual Basis Income Statement
Medium Practice Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. Which of the following is not a separate category reported on the income statement?
a. selling a major part of the business
b. income tax expense
c. a loss that is unusual
d. a loss that is both unusual and infrequent
Answer
2. Which of the following businesses would use a single step income statement?
a. a company that sells goods to the government
b. a computer manufacturer
c. a car dealership
d. an accounting firm
Answer
D. A business would use a single step income statement when it only provides a service and does not provide goods to the customer. When goods are provided, cost of goods sold and gross profit is recorded on a multi-step income statement. An accounting firm provides a service. All other choices provide goods to customers and would use a multi-step income statement.
3. A loss from a flood close to a major river will be reported as
a. a loss from discontinued operations
b. an operating expense
c. other revenues or expenses
d. gross profit
Answer
C. A flood in a location close to a major river is not infrequent and therefore it will be reported as an unusual loss in the other revenues and expenses category.
4. Losses from an earthquake in an area where an earthquake has never happened before and is not expected to occur again is reported as part of
a. gross profit
b. operating expenses
c. other revenues or expenses
d. an extraordinary item
Answer
D. This is a loss that would not be expected to occur again and is both unusual and infrequent; which is an extraordinary item.
5. A company sold equipment and realized a loss that will be reported as part of
a. gross profit
b. operating expenses
c. other revenues or expenses
d. extraordinary items
Answer
C. Gains and losses that result from selling assets are always reported under other revenues and expense. A company is not in business to sell their assets; however, this does occur often and is a peripheral activity.
6. To compute income tax expense a company multiplies the income tax rate by
a. operating income
b. income from continuing operations
c. income before taxes
d. income from discontinuing operations
Answer
C. Tax expense is reported just under income before taxes and computed by multiplying the tax rate by income before taxes (the amount just above it). Operating income is before other revenues and expenses. Income from continuing operations is reported after tax expense and discontinued operations is reported after income from continuing operations.
7. The multi-step income statement is presented in the following order
a. gross profit, income from continuing operations, income from operations
b. income from operations, income from discontinued operations, income before income taxes
c. gross profit, income from operations, income from continuing operations
d. sales, income from operations, gross profit
Answer
C. The income statement is presented: Sales less cost of goods sold = gross profit less operating expenses = income from operations + – other revenues/expenses = income before tax less tax expense = income from continuing operations. Then discontinued operations and extraordinary items are just before net income
8. How much of each sales dollar is available to cover operating expenses is given by
a. cost of goods sold
b. other revenues and expenses
c. gross profit
d. operating income
Answer
C. Gross profit gives the amount earned just from providing the goods to the customer. This amount must cover operating expenses to get income from operations. Other revenues and expenses are peripheral activities not part of day to day business operations.
9. The cost of making or purchasing inventory that is sold to customers is
a. cost of goods sold
b. inventory expenses
c. gross profit
d. operating income
Answer
A. Cost of goods sold is ONLY the cost of making or purchasing inventory that is sold to customers. The term inventory expense is not used. Gross profit is sales less cost of goods sold. Operating income is gross profit less operating expenses.
10. What amount of earnings is directly related to day to day primary business operations?
a. cost of goods sold
b. other revenues and expenses
c. gross profit
d. operating income
Answer
D. Operating income is directly related to the results of day to day operations of providing goods or services to customers. It includes gross profit and cost of goods sold. It does not include other revenues and expenses which are peripheral activities.
11. The following income statement was prepared incorrectly. Prepare a multi-step income statement in proper format and answer the following questions:
A. What profit was obtained from selling goods only?
B. What is the cost of primary day to day operations?
C. What was the profit or loss from selling assets used in the business?
D. What is the profit from primary day to day business activity?
E. What is the total earned by the company for the current period, expected to continue into future years?
| Sales | 1,000,000 |
| Rent income | 8,000 |
| Dividend income | 3,000 |
| – Cost of goods sold | ( 400,000) |
| = Gross profit | 611,000 |
| – Operating expenses: | |
| Salaries expense | 200,000 |
| Administrative expense | 125,000 |
| Loss from fire | 22,000 |
| Gain on sale of equipment | 10,000 |
| = Income from operations | 274,000 |
| Depreciation expense | 75,000 |
| Restructuring expense | 50,000 |
| = Income from continuing operations | 149,000 |
| – Discontinued operation – Loss from selling | |
| major part of the business | (40,000) |
| – Loss on sale of Investments | (25,000) |
| =Income before tax | 84,000 |
| – income tax expense | (45,000) |
| = Net income | 39,000 |
Answer
| Sales | 1,000,000 |
| – Cost of goods sold | ( 400,000) |
| = Gross profit | 600,000 |
| – Operating expenses: | |
| Salaries expense | 200,000 |
| Depreciation expense | 75,000 |
| Administrative expense | 125,000 |
| Restructuring expense | 50,000 |
| = Income from operations | 150,000 |
| – + Other revenues and expenses | |
| Loss from fire | (22,000) |
| Rent income | 8,000 |
| Dividend income | 3,000 |
| Loss on sale of Investments | (25,000) |
| Gain on sale of equipment | 10,000 |
| =Income before tax | 124,000 |
| – income tax expense | (45,000) |
| = income from continuing operations | 79,000 |
| – Discontinued operation – Loss from selling | |
| major part of the business | (40,000) |
| = Net income | 39,000 |
A. What profit was obtained from selling goods only?
| Sales | 1,000,000 |
| – Cost of goods sold | ( 400,000) |
| = Gross profit | 600,000 |
B. What is the cost of primary day to day operations?
| Salaries expense | 200,000 |
| Depreciation expense | 75,000 |
| Administrative expense | 125,000 |
| Restructuring expense | 50,000 |
| Total | 450,000 |
C. What was the profit or loss from selling assets used in the business?
Gain on sale of equipment 10,000
D. What is the profit from primary day to day business activity?
Income from operations 150,000
E. What is the total earned by the company for the current period, expected to continue into future years?
Income from continuing operations 79,000
12. Burl Fence Company uses forklifts that cost $120,000 to operate the day to day business. The forklifts are expected to be used by the company for 6 years and then disposed of for nothing. The manufacturer of the forklifts believes they will have a useful life of 10 years. The straight-line method of depreciation is used.
State the line items and amounts that will be reported on the balance sheet and the income statement related to the use of the forklifts for the third year of use.
Answer
Depreciation Expense for each year = $120,000 / 6 years = $20,000 each year
The cost of the forklifts is expensed over the length of time the forklifts are expected to be used by the company; not the time the manufacturer expects it to be used.
The cost of using the forklifts must be matched to the revenue generated by the company while using the forklifts.
Balance Sheet:
| Forklifts | $120,000 | original cost; always | |
| Accumulated Depreciation | ($60,000) | 3 years x $20,000 each year | |
| Forklifts, Net | 60,000 | the amount not yet expensed |
The balance sheet is cumulative.
Income Statement:
Depreciation Expense $20,000
(an operating expense)
The income statement reports the expense for one year only.
13. A “California Pizza Company” store had the following transactions occur
during the month of March:
1) The company collected $2,000 from credit card companies for pizzas that were provided to customers in February.
2) The company provided $24,000 in pizzas to customers in March. 95% of the sales were collected in March.
3) Employees worked and the company incurred $9,000 in salaries in March; 80% of this amount was paid in March and 20% was paid in April.
4) The February utility bills of $600 were paid in March. The March utility bill has not yet been received and is expected to be approximately $500.
5) The March cell phone bills of $300 were received and paid in April.
6) The company purchased new tables for customers to eat at for $9,000 in March. The tables are expected to be used for 3 years and were used in March.
7) The company sold the old tables in March at a loss of $1,000.
8) Liability insurance in the amount of $2,000 to cover the 1st six months of the year was paid in January
9) Marketing brochures to be put on customer’s doors during a 3-month period beginning in April were purchased and paid for in March; $600
10) The annual rent for the retail store, in the amount of $15,000, was paid for at the beginning of the year in January.
11) The company expects to pay income tax at a rate of 30%. Income taxes will be
paid for the entire year in December.
12) The monthly rent expense for kitchen equipment and fixtures is $2,200.
13) The cost of food for pizzas provided to customers was $6,000
Prepare the appropriate income statement in proper format for the California Pizza Company store.
Answer
| Sales | 24,000 |
| – Operating Expenses: | |
| Cost of Food | 6,000 |
| Salaries | 9,000 |
| Rent | 3,450 |
| Insurance | 333 |
| Depreciation | 250 |
| Utilities | 500 |
| Cell Phones | 300 |
| Income from Operations | 4,167 |
| Loss on sale of furniture | (1,000) |
| Income before Tax | 3,167 |
| Tax Expense | ( 950) |
| Net Income | 2,217 |
1) The company collected $2,000 from credit card companies for pizzas that were provided to customers in February.
Provided to customers in February is February revenue; not March
2) The company provided $24,000 in pizzas to customers in March. 95% of the sales were collected in March.
Provided to customers in March is all March revenue.
When the cash is collected does not matter to the income statement.
3) Employees worked and the company incurred $9,000 in salaries in March; 80% of this amount was paid in March and 20% was paid in April.
Employees working provide a service to the company in March.
When employees are paid does not matter to the income statement.
4) The February utility bills of $600 were paid in March. The March utility bill has not yet been received and is expected to be approximately $500.
When the cost of utilities is paid does not matter to the income statement.
$600 was provided in February and is a February expense. A service was provided to the company in March and the company must estimate the amount if the amount is not yet known and record a March expense for the service provided to the company in March.
5) The March cell phone bills of $300 were received and paid in April.
The service was provided to the company in March. When the cash is paid does not matter to the income statement.
6) The company purchased new tables for customers to eat at for $9,000 in March.
The tables are expected to be used for 3 years and were used in March.
The cost of using long-term physical assets is depreciation expense.
$9,000 / 3 years = 3,000 each year / 12 months = $250 per month
7) The company sold the old tables in March at a loss of $1,000.
The sale occurred in March and is reported on the March income statement.
8) Liability insurance in the amount of $2,000 to cover the 1st six months of the year was paid in January
The cost of the service provided in March must be reported on the March income statement. $2,000 / 6 months = $333 per month
9) Marketing brochures to be put on customer’s doors during a 3-month period beginning in April were purchased and paid for in March; $600
No service was provided to the company in March. The brochures are an asset until the advertising is provided. The expense is reported in April to match the revenue generated from the advertising done in April.
10) The annual rent for the retail store, in the amount of $15,000, was paid for
at the beginning of the year in January.
The service of using the space was provided in March. One month must be expensed on the March income statement: $15,000 / 12 months = $1,250
11) The company expects to pay income tax at a rate of 30%. Income taxes for the year will be paid in December.
Income before tax is multiplied by 30% to get the estimated tax expense for the month of March. The matching principle requires the expense to be recorded in the same period as the profit from sales.
12) The monthly rent expense for kitchen equipment and fixtures is $2,200.
The service of using the equipment and fixtures was provide in March.
13) The cost of food for pizzas provided to customers was $6,000
The cost of the inventory used up in March must be expensed in March.
14. Read the income statement and answer the following questions for 201x:
a. What is the cost of products that were sold to customers?
b. How much did the company earn for each share of common stock outstanding?
c. How much did the company earn or incur from other activities not part of day to day primary business?
d. How much was spent to acquire customers and run the day to day operations of the business?
e. How much must be paid to the federal government for current year earnings?
f. What was the total price of goods provided to customers?
Consolidated Statements of Income
YUM! Brands, Inc. and Subsidiaries
Fiscal years ended December 25, 201x, December 26, 200x and December 27, 20xx
(in millions, except per share data)
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201x |
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200x |
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20xx |
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Revenues |
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Company sales |
|
$ |
9,783 |
|
|
|
$ |
9,413 |
|
|
|
$ |
9,843 |
|
|
Franchise and license fees and income |
|
|
1,560 |
|
|
|
|
1,423 |
|
|
|
|
1,461 |
|
|
Total revenues |
|
|
11,343 |
|
|
|
|
10,836 |
|
|
|
|
11,304 |
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|
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|
|
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|
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|
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|
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|
|
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Costs and Expenses, Net |
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Company restaurants |
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|
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|
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|
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Food and paper |
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3,091 |
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|
|
3,003 |
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|
|
|
3,239 |
|
|
Payroll and employee benefits |
|
|
2,172 |
|
|
|
|
2,154 |
|
|
|
|
2,370 |
|
|
Occupancy and other operating expenses |
|
|
2,857 |
|
|
|
|
2,777 |
|
|
|
|
2,856 |
|
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Company restaurant expenses |
|
|
8,120 |
|
|
|
|
7,934 |
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|
|
|
8,465 |
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|
|
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|
|
|
|
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|
|
|
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|
|
|
|
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General and administrative expenses |
|
|
1,277 |
|
|
|
|
1,221 |
|
|
|
|
1,342 |
|
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Franchise and license expenses |
|
|
110 |
|
|
|
|
118 |
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|
|
|
99 |
|
|
Closures and impairment (income) expenses |
|
|
47 |
|
|
|
|
103 |
|
|
|
|
43 |
|
|
Refranchising (gain) loss |
|
|
63 |
|
|
|
|
(26 |
) |
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|
|
(5 |
) |
|
Other (income) expense |
|
|
(43 |
) |
|
|
|
(104 |
) |
|
|
|
(157 |
) |
|
Total costs and expenses, net |
|
|
9,574 |
|
|
|
|
9,246 |
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|
|
|
9,787 |
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|
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|
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|
|
|
|
|
|
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Operating Profit |
|
|
1,769 |
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|
|
|
1,590 |
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|
|
|
1,517 |
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|
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|
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|
|
|
|
|
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Interest expense, net |
|
|
175 |
|
|
|
|
194 |
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|
226 |
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|
|
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Income Before Income Taxes |
|
|
1,594 |
|
|
|
|
1,396 |
|
|
|
|
1,291 |
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|
|
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|
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|
|
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Income tax provision |
|
|
416 |
|
|
|
|
313 |
|
|
|
|
319 |
|
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Net Income – including noncontrolling |
|
|
1,178 |
|
|
|
|
1,083 |
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|
|
|
972 |
|
|
Net Income – noncontrolling interest |
|
|
20 |
|
|
|
|
12 |
|
|
|
|
8 |
|
|
Net Income – YUM! Brands, Inc. |
|
$ |
1,158 |
|
|
|
$ |
1,071 |
|
|
|
$ |
964 |
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Basic Earnings Per Common Share |
|
$ |
2.44 |
|
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|
$ |
2.28 |
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$ |
2.03 |
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Diluted Earnings Per Common Share |
|
$ |
2.38 |
|
|
|
$ |
2.22 |
|
|
|
$ |
1.96 |
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Dividends Declared Per Common Share |
|
$ |
0.92 |
|
|
|
$ |
0.80 |
|
|
|
$ |
0.72 |
|
Answer
a. What is the cost of products that were sold to customers?
Food and paper 3,091
b. How much did the company earn for each share of common stock outstanding?
Either: Basic EPS $2.44 or Diluted EPS $2.38
Basic is using current shares; Diluted is using all potential shares
c. How much did the company earn or incur from other activities not part of day to day primary business?
Interest Expense, net 175
d. How much was spent to acquire customers and run the day to day operations of the business?
Total cost and expense 9,574 less cost of food and paper 3,091 = 6,483
e. How much must be paid to the federal government for current year earnings?
Income Tax Provision 416
f. What was the total price of goods provided to customers?
Total revenues 11,343
Franchisees are also customers of the company; the company is providing the service of helping the franchisee operate their store.