question

Sustainable income is equal to net income. True/False

answer

False

question

Which amount is calculated when net income is adjusted for irregular items? A. Sustainable income B. Comprehensive income C. Quality income D. Accrual income

answer

A. Sustainable income

question

Sustainable income differs from net income because of which of the following items? A. Gains and losses B. Gains and losses, and regular and irregular revenues C. Irregular revenues, irregular expenses D. Gains and losses, and irregular revenues and irregular expenses

answer

A. Gains and losses

question

A corporation shows income from continuing operations of $175,000. It has an extraordinary gain (pretax) of $50,000 and its tax rate is 30%. How much is the corporation's net income? A. $225,000 B. $210,000 C. $140,000 D. $125,000

answer

B. $210,000

question

Which of the following is not an irregular item on the income statement? A. Discontinued operations B. Extraordinary items C. Other revenues and expenses D. All of the answer choices are irregular items

answer

C. Other revenues and expenses

question

How are irregular items reported on the income statement? A. As part of sustainable income B. In a separate section below income from sustainable operations C. As part of other revenues and expenses D. In a separate section below cost of goods sol

answer

B. In a separate section below income from sustainable operations

question

Where are extraordinary items reported on the income statement? A. Immediately below income from continuing operations B. Immediately before income before income taxes C. Immediately below income before income taxes D. Immediately after discontinued operations

answer

D. Immediately after discontinued operations

question

Which of the following is not considered to be an extraordinary item? A. Losses attributable to a labor strike B. Effects of rare major natural casualties C. Expropriation of property by a foreign government D. Effects of a newly enacted law or regulation

answer

A. Losses attributable to a labor strike

question

Sudley Shoppe had severe damage done to its Christmas inventory due to an escaped circus elephant rampaging through the store. The inventory loss was $80,000 before applicable taxes of $20,000. How should Sudley Shoppe report the loss? A. $80,000 loss in other expenses and losses B. $80,000 extraordinary loss C C. $60,000 extraordinary loss D. $100,000 extraordinary loss

answer

C. $60,000 extraordinary loss

question

In reporting discontinued operations, which of the following should be shown in a separate section of the income statement? A. Gains on the disposal of the discontinued business segment B. Wages expense C. Depreciation expense D. Sales revenue

answer

A. Gains on the disposal of the discontinued business segment

question

Cool Stools Corporation has income before taxes of $400,000 and a pretax extraordinary loss of $100,000. If the income tax rate is 25%, the income statement should show income before irregular items and extraordinary items, respectively, of A. $325,000 and $100,000 B. $325,000 and $75,000 C. $300,000 and $100,000 D. $300,000 and $75,000

answer

C. $300,000 and $100,000

question

Which of the following is considered an "Other comprehensive income" item? A. Gain on disposal of discontinued operations B. Unrealized loss on available-for-sale securities C. Extraordinary loss related to flood D. Income before taxes

answer

B. Unrealized loss on available-for-sale securities

question

According to the FASB, what is added to or subtracted from net income to determine comprehensive income? A. Dividends B. Additional investments by the stockholders C. All changes in stockholders' equity except changes resulting from transactions with stockholders D. All changes in stockholders' equity

answer

C. All changes in stockholders' equity except changes resulting from transactions with stockholders

question

Which of the following is income that includes all changes in stockholders' equity during a period except those resulting from investments by stockholders and distributions to stockholders? A. Net income B. Income from continuing operations C. Comprehensive income D. Sustainable income

answer

C. Comprehensive income

question

A company has net income of $200,000. Its portfolio of available-for-sale securities has a cost of $50,000 and a market value at the end of its accounting period of $54,000. How much is the company's comprehensive income? O A. $254,000 O B. $250,000 C C. $204,000 O D. $246,000

answer

C. $204,000

question

Horizontal analysis is a technique for evaluating and comparing several companies at one time. O A. True C B. False

answer

False

question

Total current liabilities are $10,000 in 2012, $18,000 in 2013, and $22,000 in 2014. What is the percentage increase from 2012 to 2014? O A. 22% O B. 80% C C. 120% O D. It cannot be computed from the data given

answer

$120%

question

Assume the following cost of goods sold data for a company: *2014 1,500,000 *2013 1,200,000 *2012 900,000 If 2012 is the base year, what is the percentage increase in cost of goods sold from 2012 to 2014? A. 166.7% B. 66.7% C. 60.0% D. 40.0%

answer

66.7%

question

Assume the following cost of goods sold data for a company: *2014 1,600,000 *2013 1,500,000 *2012 1,200,000 If 2012 is the base year, what is the percentage increase in cost of goods sold from 2012 to 2014? A. 44.4% B. 33.3% C. 66.7% D. 133.3%

answer

33.3%

question

In horizontal analysis of a balance sheet, of what amount is each item expressed as a percentage? A. Current year net income amount B. Current year stockholders' equity amount C. Current year total assets amount D. Base-year amount

answer

D. Base-year amount

question

Adams Corporation reported net sales of $300,000, $330,000, and $360,000 in the years 2012, 2013, and 2014, respectively. If 2012 is the base year, what percentage do 2014 sales represent of the base? A. 77% B. 108% C. 120% D. 130%

answer

C. 120%

question

Vertical analysis is a technique for evaluating financial statement data by expressing each item in a financial statement as a percent of a base amount in that statement. A. True B. False

answer

true

question

The following schedule is a display of what type of analysis? Amount/Percent/Current assets $200,000/25% Property, plant, and equipment 600,000/75% Total assets $800,000/100% A. Horizontal analysis B. Trend analysis C. Vertical analysis D. Ratio analysis

answer

C. Vertical analysis

question

In vertical analysis, what is the base amount for depreciation expense? A. Net sales B. Depreciation expense in a previous year C. Gross profit D. Fixed assets

answer

A. Net sales

question

Ceradyne, Inc. presented the following data for a company: Current liabilities $360 Long-term debt 480 Common stock 640 Retained earnings 520 Total liabilities & stockholders' equity $2,000 How would common stock appear on a common size balance sheet using vertical analysis? A. 75.0% B. 55.1% C. 32.0% D. Cannot be determined from the data given

answer

C 32.0%

question

Solvency ratios measure a company's ability to pay its currently maturing obligations. A. True B. False

answer

B. False

question

Profitability ratios provide information about a firm's success in generating income from operations. A. True B. False

answer

A. True

question

Who is most interested in a company's solvency? A. Short-term creditors B. Stockholders C. Competitors D. Long-term creditors

answer

D. Long-term creditors

question

Who is most interested in a company's current ratio? A. Short-term creditors B. Stockholders C. Competitors D. Long-term creditors

answer

A. Short-term creditors

question

Which measure(s) is (are) useful in evaluating the efficiency in managing inventories? A. Inventory turnover B. Days in inventory C. Both inventory turnover and days in inventory D. None of the answer choices are correct.

answer

C. Both inventory turnover and days in inventory

question

Which of the following is not a liquidity ratio? A.Current ratio B. Asset turnover C. Inventory turnover D. Accounts receivables turnover

answer

B. Asset turnover

question

Plano Corporation reported net income $24,000; net sales $400,000; and average assets of $600,000 for 2014. What is the 2014 profit margin? A. 6% B. 12% C. 40% D. 200%

answer

A. 6%

question

The price-earnings ratio allows investors to make a meaningful evaluation of market values and earnings across firms. A. True B. False

answer

A. True

question

Pro forma income includes unusual and nonrecurring items. A. True B. False

answer

B. False

question

Which situation below might indicate a company has a low quality of earnings? A. The same accounting principles are used each year. B. Revenue is recognized when earned. C. Maintenance costs are capitalized and then depreciated. D. The company's P-E ratio is high relative to competitors.

answer

C. Maintenance costs are capitalized and then depreciated.

question

Which of the following will differ under IFRS compared to statements prepared under GAAP? A. Vertical analysis B. Horizontal analysis C. Ratio analysis D. None of the above

answer

D. None of the above

question

Which of the following is true for reporting extraordinary items under IFRS? A. They are reported immediately after income from continuing operations on the income statement. B. They are considered to be ordinary. C. They are reported as part of comprehensive income. D. They are reported on the balance sheet.

answer

B. They are considered to be ordinary.

question

What is the income statement referred to under IFRS? A. Statement of profit B. Statement of earnings C. Statement of comprehensive income D. Operations statement

answer

C. Statement of comprehensive income

question

What is the format of the one-statement income statement approach under IFRS? A. All income items are netted together with no distinction of which items relate to comprehensive income. B. All components of revenue and expense are reported in a combined statement which computes net income or loss followed by components of comprehensive income or loss to arrive at comprehensive income. C. A combined statement computes comprehensive income or loss followed by deductions of the components of comprehensive income or loss to arrive at net income. D. Items considered part of comprehensive income are listed amongst the revenues and expenses.

answer

B. All components of revenue and expense are reported in a combined statement which computes net income or loss followed by components of comprehensive income or loss to arrive at comprehensive income.

question

Sustainable Income

answer

Net income adjusted for irregular items.

question

Irregular items are separately identified on the income statement. Two types are:

answer

*Discontinued operations. *Extraordinary items.

question

Discontinued Operations

answer

*Disposal of a significant component of a business. *Income statement should report a gain (or loss) from *discontinued operations, net of tax.

question

Extraordinary items are events and transactions that meet two conditions:

answer

*Both *Unusual in nature and *Infrequent in occurrence

question

Are these considered Extraordinary Items? Effects of major natural casualties, if rare in the area. (yes/no)

answer

yes

question

Are these considered Extraordinary Items? Effects of major natural casualties, not uncommon in the area. (yes/no)

answer

no

question

Are these considered Extraordinary Items? Write-down of inventories or write-off of receivables. (yes/no)

answer

no

question

Are these considered Extraordinary Items? Expropriation (takeover) of property by a foreign government. (yes/no)

answer

yes

question

Are these considered Extraordinary Items? Losses attributable to labor strikes. (yes/no)

answer

no

question

Are these considered Extraordinary Items? Effects of a newly enacted law or regulation, such as a condemnation action. (yes/no)

answer

yes

question

Are these considered Extraordinary Items? Gains or losses from sales of property, plant, or equipment. (yes/no)

answer

no

question

sustainable income: Changes in Accounting Principle

answer

*Principle used in the current year is different from one used in the preceding year. *Example - change from FIFO to average cost. *Permissible when management can show new principle is preferable. *Most changes are reported retroactively

question

Comprehensive Income; All changes in stockholders' equity except those resulting from

answer

investments by stockholders and distributions to stockholders.

question

Certain gains and losses bypass net income and instead are

answer

reported as direct adjustments to stockholders' equity.

question

Analyzing financial statements involves:

answer

*comparison basis *Basic tools

question

comparison basis

answer

*Intracompany *Intercompany *Industry averages

question

basic tools

answer

*Horizontal analysis *Vertical analysis *Ratio Analysis

question

Horizontal Analysis

answer

Also called trend analysis, is a technique for evaluating a series of financial statement data over a period of time.

question

purpose of horizontal analysis

answer

to determine increase or decrease that has taken place.

question

Hortizontal analysis is Commonly applied to the

answer

balance sheet and income statement.

question

Vertical Analysis

answer

Also called common-size analysis, is a technique that expresses each financial statement item as a percent of a base amount.

question

Vertical analysis is commonly applied to the

answer

balance sheet and the income statement.

question

Financial Ratio Classifications

answer

liquidity, solvency, profitability

question

liquidity

answer

Measures short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

question

solvency

answer

Measures the ability of the company to survive over a long period of time.

question

profitability

answer

Measures the income or operating success of a company for a given period of time.

question

Which of the following is considered a disposal of a significant component of a business? A. Shifting production activities from one location to another B. Elimination of a major class of customers C. Phasing out of a model D. Disposal of part of a line of business

answer

B. Elimination of a major class of customers

question

A company that has a ____ provides full and transparent information that will not confuse or mislead users of the financial statements

answer

high quality of earnings

question

Pro Forma Income

answer

*Usually excludes items that are unusual or nonrecurring. *Some companies have abused the flexibility that pro forma numbers allow to put their companies in a more favorable light.

question

Alternative Accounting Methods

answer

*Improper recognition of revenue (channel stuffing). *Improper capitalization of operating expenses (WorldCom). *Failure to report all liabilities (Enron).

question

Price-Earnings Ratio

answer

Reflects investors' assessment of a company's future earnings

question

P-E ratio will be __ if investors think that earnings will increase substantially in the future.

answer

higher

question

P-E ratio will be __ when there is the belief that a company has poor-quality earnings

answer

lower

question

Analyzing financial statements involves:

answer

*Characteristics *Comparison *Bases

question

Characteristics

answer

*Liquidity *Profitability *Solvency

question

Comparison Bases

answer

*Intracompany *Industry averages *Intercompany

question

Liquidity Ratios

answer

Measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

question

Short-term creditors such as bankers and suppliers are particularly interested in ___

answer

assessing liquidity.

question

Ratios include the

answer

*current ratio *the current cash debt coverage, *accounts receivables turnover, *average collection period, *inventory turnover *days in inventory.

question

Current Ratio

answer

Expresses the relationship of current assets to current liabilities.

question

Current Cash Debt Coverage

answer

Because it uses cash provided by operating activities, it may provide a better representation of liquidity.

question

Accounts Receivables Turnover

answer

Measures the number of times, on average, a company collects receivables during the period.

question

Average Collection Period

answer

Converts the receivable turnover ratio into days.

question

Inventory Turnover

answer

Measures the number of times average inventory was sold during the period.

question

Days in Inventory

answer

Measures the average number of days inventory is held.

question

Solvency Ratios

answer

measure the ability of a company to survive over a long period of time.

question

Debt-Paying Ability

answer

*Debt to total assets ratio *Times interest earned *Cash debt coverage

question

Free cash flow provides information about

answer

solvency and ability to pay additional dividends or investments

question

Debt to Assets Ratio

answer

Indicates the degree of financial leveraging. Provides some indication of the company's ability to withstand losses.

question

Times Interest Earned

answer

(also called interest coverage) indicates the company's ability to meet interest payments as they come due.

question

Cash Debt Coverage

answer

Indicates a company's ability to repay its liabilities from cash generated from operating activities without having to liquidate the assets used in its operations.

question

Free Cash Flow

answer

Ability to pay dividends or expand operations.

question

Profitability Ratios

answer

Measure the income or operating success of a company for a given period of time.

question

Return on Common Stockholders' Equity (ROE)

answer

Shows how many dollars of net income the company earned for each dollar invested by the owners.

question

Return on Assets

answer

Measures the overall profitability of assets in terms of the income earned on each dollar invested in assets.

question

Profit Margin -

answer

(rate of return on sales) is a measure of the percentage of each dollar of sales that results in net income.

question

High-volume (high inventory turnover) businesses such as grocery stores and pharmacy chains generally have __ profit margins

answer

low

question

Asset Turnover

answer

- Measures how efficiently a company uses its assets to generate sales.

question

Gross Profit Rate

answer

- Indicates a company's ability to maintain an adequate selling price above its cost of goods sold.

question

Earnings Per Share

answer

A measure of the net income earned on each share of common stock.

question

Price-Earnings (P-E) Ratio

answer

Reflects investors' assessments of a company's future earnings

question

A __ P-E ratio suggests that the market is more optimistic. It might also signal that its stock is ____.

answer

high; overpriced

question

Payout Ratio

answer

Measures the percentage of earnings distributed in the form of cash dividends.

question

current ratio: formula

answer

current assets/current liabilities

question

inventory turnover ratio: formula

answer

COGS/average inventory

question

days in inventory ratio: formula

answer

365 days/inventory turnover ratio

question

receivables turnover ratio: formula

answer

net credit sales/average net receivables

question

average collection period ratio: formula

answer

365 days/receivables turnover ratio

question

debt to total assets ratio: formula

answer

total assets/total liabilities

question

gross profit rate [ratio]: formula

answer

gross profit/net sales

question

profit margin ratio: formula

answer

net income/net sales

question

return on assets ratio: formula

answer

net income/average total assets

question

defination (purpose of): inventory turnover ratio

answer

measure of the lqiuidity in inventory

question

defination (purpose of): days in inventory ratio

answer

measure of the average # of days the inventoryo is held

question

defination (purpose of): receivables turnover ratio

answer

measure of the liquidity of receivables

question

defination (purpose of): average collection period ratio

answer

average # of days the receivables are outstanding

question

defination (purpose of): debt to total assets ratio

answer

measure of hte % of total financing provided by creditors

question

defination (purpose of): gross profit rate

answer

gross profit exprssed as a % of sales

question

defination (purpose of): profit margin ratio:

answer

measure of the net income generated by each $1 of sales

question

defination (purpose of): return on assets ratio

answer

profitability measure that indactes the amount of net income generated by each dollar of assets

question

liquidity ratios

answer

measure the short-term liability of the company to pay its maturing obligations

question

solvency ratios

answer

measure the ability of the company to survive over a long period of time

question

profitability ratios

answer

measure the income or operating success of a company

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