Chapter.17 Exam Prep Company Performance Profitability

Chapter 17

Company Performance: Profitability

MATCHING

1. Match the following terms.

A) An income measure that includes both the operating and other nonoperating activities

that caused change in retained earnings during the period

B) The result of a company selling or deposing of a segment of its business

C) Reports all changes in owners’ equity (excludes investments, distributions, and

errors)

D) A common-size measure of earnings

E) Gains or losses that are both unusual and infrequent

_____ 1. Earnings per Share

_____ 2. Extraordinary Items

_____ 3. Comprehensive Income

_____ 4. Net Income

_____ 5. Discontinued Operations

2. For each of the following, indicate whether the item is an operating item on the income statement (O), a nonoperating item on the income statement (N), considered other comprehensive income (C), or a balance sheet item (B).

_____ 1. Sales

_____ 2. Cash

_____ 3. Unrealized gains

_____ 4. Gain on sale of equipment

_____ 5. Tax expense

_____ 6. Advertising expense

_____ 7. Loss due to fire damage

_____ 8. Interest payable

_____ 9. Cost of goods sold

_____ 10. Accumulated depreciation

3. Match each of the following financial statements with the accounts listed below.

1. Income Statement
2. Balance Sheet
3. Cash Flow Statement
4. Comprehensive Income Statement

_____ 1. Cash generated from sales

_____ 2. Cost of goods sold

_____ 3. Interest expense

_____ 4. Loss on sale of equipment

_____ 5. Tax expense

_____ 6. Accumulated depreciation

_____ 7. Loss due impairment of building

_____ 8. Cash from sale of equipment

_____ 9. Unrealized gain

_____ 10. Taxes payable

5. Match each of the income statement classifications below with the following accounts.

A. Operating

B. Nonoperating

C. Net of Tax

D. Comprehensive Income

E. Balance Sheet Item

_____ 1. Rent expense

_____ 2. Gain on sale of equipment

_____ 3. Loss due to earthquake in Nebraska

_____ 4. Gain on sale of component of business

_____ 5. Sales

_____ 6. Interest expense

_____ 7. Accumulated depreciation

_____ 8. Impairment loss

_____ 9. Cost of goods sold

_____10. Unrealized gain on investments

Answers: 1. A; 2. B; 3. C; 4. C; 5. A; 6. B; 7. E; 8. B; 9. A; 10. D

MULTIPLE CHOICE

6. Comprehensive income includes all the following except:

A) gains.

B) expenses.

C) distributions to owners.

D) unrealized gains on investment.

7. Comprehensive income is also referred to as:

A) earnings.

B) net income.

C) income from continuing operations.

D) none of the above.

8. Income tax expense is deducted in determining:

A) total revenue.

B) gross margin.

C) income from operations.

D) income from continuing operations.

9. The gain resulting from a company selling off a component of its business is reported on the company’s income statement as:

A) an extraordinary item.

B) discontinued operations.

C) a prior period adjustment.

D) a cumulative accounting adjustment.

10. For the year ending December 31, 2010, Running, Inc. had a pretax extraordinary gain of $395,000, whereas income before extraordinary items equaled $2,376,000. Assuming Running Inc. had no discontinued operations and an effective tax rate of 40 percent, the net income reported by the company was:

A) $2,771,000.

B) $2,613,000.

C) $2,534,000.

D) $1,662,600.

11. During prior periods, the Rocket Company used the double-declining balance method for

depreciating its equipment, but in 2010 it decided to switch to the straight-line method.

The equipment was purchased in 2008 for $1,000,000 and had a 10-year life. The

balance in the accumulated depreciation account for equipment at the beginning of 2010

was $360,000. How will 2010’s net income be changed by switching to the new

depreciation if Rocket has an effective tax rate of 40 percent.

A) $ 60,000 smaller

B) $16,800 larger

C) $28,000 larger

D) $40,000 smaller

12. Mountain Industries has machinery that cost $100,000, with an estimated salvage value of $15,000 and a 5-year useful life. At the start of the third year of the machinery’s life, the company switched from the straight-line method of depreciation to the double-declining balance method. What will be the new depreciation for the year?

A) $17,000

B) $40,000

C) $24,000

D) $14,400

13. The effect of a switch from Average Costing to FIFO would affect which section of the income statement?

A) Cost of Goods Sold

B) Net of Tax Adjustment

C) Comprehensive Income

D) Cumulative accounting adjustments

14. The income from operations of a discontinued division would be included in which section of the income statement?

A) Income from operations

B) Prior period adjustments

C) Net of tax item

D) Nonoperating section of income statement

15. A loss on the sale of equipment would be included in which element of net income?

A) Operating income

B) Prior period adjustments

C) Nonoperating section

D) Net of tax item

16. Which of the following statements is false about earnings per share?

A) They are a required disclosure on the face of the income statement.

B) They are a common size measure of a company’s earnings performance.

C) They are the amount that each stockholder will receive as dividends that period.

D) They reflect the amount of a company’s earnings belonging to each shareholder on a per-share basis.

17. In calculating earnings per share, the numerator is:

A) income from continuing operations.

B) net income plus common dividends.

C) net income minus preferred dividends.

D) income before taxes plus preferred dividends.

18. Alamo, Inc. had 480,000 shares of common stock outstanding on January 1, 2010. An additional 150,000 shares were issued on May 1, 2010, and 60,000 shares were repurchased on October 1, 2010. The weighted average number of shares outstanding during 2010 was:

A) 475,000.

B) 565,000.

C) 570,000.

D) 630,000.

19. Jackson, Inc. had 360,000 shares of common stock outstanding on January 1, 2010, and issued 60,000 additional shares on July 1, 2010. There was no preferred stock. If net income for the year ended December 31, 2010, was $1,072,500, the earnings per share were:

A) $2.23.

B) $2.55.

C) $2.75.

D) $2.98.

20. Advance Systems, Inc. had 840,000 shares of common stock outstanding on January 1, 2010, and repurchased 75,000 shares on June 1, 2010. Net income for the year ended December 31, 2010, was $2,662,625, and preferred stock dividends for the year amounted to $35,000. The earnings per share for 2010 were:

A) $3.30.

B) $3.34.

C) $3.48.

D) $3.53.

21. Under full-absorption costing,

A) companies can increase income by increasing the number of units produced.

B) all product and period costs are included in cost of goods sold.

C) only costs that vary per unit are included in cost of goods sold.

D) only direct material costs are included in cost of goods sold.

22. Under unit-variable costing,

A) companies can increase income by increasing the number of units produced.

B) all product and period costs are included in cost of goods sold.

C) only costs that vary per unit are included in cost of goods sold.

D) only direct material costs are included in cost of goods sold.

23. Under throughput costing,

A) companies can increase income by increasing the number of units produced.

B) all product and period costs are included in cost of goods sold.

C) only costs that vary per unit are included in cost of goods sold.

D) only direct material costs are included in cost of goods sold.

24. Product line income reports:

A) are a type of current cost income statement.

B) show the costs of each division on a full-costing basis.

C) make it more difficult to evaluate the performance of a division manager.

D) include only those costs controlled by a given product-line or division manager.

25. The amount of extraordinary items that would appear on the 2010 income statement of Kaiser Corporation is:

A) $0.

B) $312,000.

C) $552,500.

D) $850,000.

26. The amount of income from operations of the Telecommunications Division that would appear on the 2010 income statement of Kaiser Corporation is:

A) $297,500.

B) $312,000.

C) $552,500.

D) $850,000.

27. The amount of gain (loss) from disposal of the Telecommunications Division that would appear on the 2010 income statement of Kaiser Corporation is:

A) $129,500 loss.

B) $240,500 loss.

C) $370,000 loss.

D) $312,000 gain.

28. Kaiser Corporation’s net income for 2010 is:

A) $3,001,700.

B) $4,306,000.

C) $4,450,000.

D) $4,618,000.

29. The amount of loss from operations of the Specialties Division that would appear on the 2010 income statement of Spectrum Corporation is:

A) $770,000.

B) $477,400.

C) $331,700.

D) $292,600.

30. The amount of gain (loss) from disposal of the Specialties Division that would appear on the 2010 income statement of Spectrum Corporation is:

A) $331,700 loss.

B) $ 89,300 gain.

C) $145,700 gain.

D) $235,000 gain.

31. Spectrum Corporation’s net income for 2010 is:

A) $14,213,500.

B) $22,925,000.

C) $23,128,300.

D) $23,256,700.

32. Which of the following statements about earnings per share is false?

A) Diluted earnings per share reflects the maximum possible dilution that could result from turning convertible and nonconvertible securities into common stock.

B) Net income is reduced by applicable preferred dividends in determining earnings per share.

C) Earning per share permits useful comparison of the performance of firms of different size.

D) Firms with convertible securities present both basic and diluted earnings per share.

33. What is compromised when a firm changes from one accepted accounting method to another?

A) Matching

B) Objectivity

C) Conservatism

D) Consistency

34. What items should be included in comprehensive income but not in net income?

A) Net income

B) Foreign currency translations

C) Unrealized gains on investments

D) All the above should be included

35. The firm’s operating income for 2010 was:

A) $200,000.

B) $120,000.

C) $115,000.

D) unable to determine from the information given.

36. The firm’s net income for 2010 was:

A) $110,000.

B) $102,000.

C) $ 80,000.

D) unable to determine from the information given.

37. The firm’s income before income tax for 2008 was:

A) $200,000.

B) $120,000.

C) $115,000.

D) unable to determine from the information given.

38. The firm’s comprehensive income for 2008 was:

A) $110,000.

B) $102,000.

C) $ 80,000.

D) unable to determine from the information given

39. Which of the following are firms not required to disclose for identifiable business segments?

A) Revenues from external customers

B) Revenues from internal customers

C) Comprehensive income

D) Segment profit or loss

40. Which of the following is not an objective of financial reporting?

A) Useful for making investment and credit decisions

B) Useful for assessing cash flow prospects

C) Useful for evaluating enterprise resources

D) All the above are objectives of financial reporting

41. Bob Inc. has gross profit equal to $1,000,000. During the year Bob Inc. purchased $300,000 worth of inventory. The sales recorded during the year equaled $1,500,000. What is the value of Bob Inc.’s cost of goods sold?

A) No answer possible

B) $ 300,000

C) $ 500,000

D) $ 800,000

E) $ 1,800,000

42. What item would be included in “other revenue” found on an income statement?

A) Sales

B) Income from operations

C) Interest income

D) Extraordinary gain

43. River Inc. had an extraordinary gain equal to $ 15,000 (before taxes). The net income for River Inc. equals $ 48,000. What was the value of “income from continuing operations”?

A) $ 48,000

B) $ 36,000

C) $ 60,000

D) No answer can be determined

44. River Inc. had an extraordinary gain equal to $ 15,000 (before taxes). The net income for River Inc. equals $ 48,000 and the tax rate was 30 percent. What was the value of “income from continuing operations”?

A) $ 63,000

B) $ 58,500

C) $ 37,500

D) No answer can be determined

45. MMM Inc. had 5,000 shares outstanding on January 1, 2010. MMM Inc. issued 8,000 shares on May 1 and an additional 9,000 shares on August 1, 2010. How many shares will be used to calculated earnings per share (2010)?

A) 5,000

B) 14,083

C) 15,225

D) 15,301

E) 22,000

46. How can full-absorption costing hurt a company?

A) Business leaders might spread variable costs over more inventory.

B) Material costs might be expensed too quickly.

C) Fixed costs might be spread over more inventory.

D) Fixed costs might change to variable costs.

47. A manufacturing company using full-absorption costing can increase net income by which of the following?

A) Increasing production and increasing ending inventory at the end of the year

B) Decreasing the inventory

C) Writing ending inventory down to its fair value

D) All the above

48. A company using the throughput costing method will only place __________ into cost of goods sold.

A) labor

B) overhead

C) materials

D) sales

49. Bob’s Bait Shop wants to calculate a division’s return on investment. The profit from the division equals $10,000. The equity found in the division equals $ 50,000. This division has assets equal to $35,000. Calculate the return the division is generating.

A) 143 percent

B) 70 percent

C) 29 percent

D) 20 percent

50. What item would not be part of the cost of inventory under the variable costing method?

A) Depreciation on the manufacturing building

B) Direct materials

C) Direct labor

D) All the above would be included in the variable cost of inventory

51. Assume a company has no dilutive securities. What number will be greater?

A) Basic earnings per share

B) Diluted earnings per share

C) Question cannot be answered

D) A & B should be the same

52. Fishing Lures Inc. reported a net income of $15,000. The dividends declared & paid to the common shareholders equaled $5,000. Fishing Lures Inc. had 10,000 shares outstanding all year long. What is Fishing Lures Inc.’s earnings per share?

A) $ .50

B) $1.00

C) $1.50

D) $2.00

53. Speed Inc. reported a net income equal to $15,000. The dividends declared & paid to the preferred shareholders equaled $ 5,000 and paid the common stockholders a dividend of $8,000. Speed Inc. had 10,000 shares outstanding all year long. What value is Speed Inc.’s earnings per share?

A) $ .50

B) $1.00

C) $1.50

D) $ .20

54. What information is provided by business internal profitability reporting that is not provided by the financial statements?

55. Explain how a firm can manipulate income by increasing inventory under full absorption costing.

56. Why might the use of return on assets to evaluate investment centers lead to bad decisions?

57. Some analysts prefer to evaluate firms on the basis of operating income, but other analysts prefer net income. Which do you believe is more appropriate and why do you believe that?

58. What is comprehensive income and how does it differ from net income?

59. Alpine, Inc. gathered the following information for its year ended December 31, 2010:

The common stock was outstanding the entire year and the company’s effective tax rate is 40 percent. Prepare a multiple step income statement, including earnings per share, for the year ending December 31, 2010.

60. Macroteledyne, Inc.’s income from continuing operations before taxes was $2,000,000 for the year ended December 31, 2010. The company’s effective tax rate is 40 percent and during the year the following events also took place:

The company sold one of its divisions at a gain of $250,000. The division had an operating loss of $185,000 through the date of disposal.

A flood destroyed a warehouse owned by the company. The amount of the uninsured loss was $375,000. This was the first flood ever in this area.

Required: Prepare the lower portion of the income statement, from “income from continuing operations before taxes” through “net income,” for the year ended 12/31/10.

61. Riegle Inc.’s income from continuing operations before taxes was $4,000,000 for the year ended December 31, 2010. The company’s effective tax rate is 30 percent, and during the year the following events also took place:

The company sold one of its divisions at a gain of $500,000. The division had an operating loss of $325,000 through the date of disposal.

Riegle is located in Chicago and a small earthquake damaged a warehouse owned by the company. The amount of the uninsured loss was $575,000.

Required: Prepare the lower portion of the income statement, from “income from continuing operations before taxes” through “net income,” for the year ending December 31, 2010. All during 2010 1,000,000 shares of stock were authorized and 850,000 were issued and 800,000 were outstanding.

62. Big Cat Inc. has the balances that follow (Year Ending: December 31, 2010). Using the following accounts and amounts, create a multistep income statement (Tax Rate = 20%). Big Cat had 100,000 shares authorized, 90,000 issued, and 80,000 outstanding all year long.

63. Big Red Inc. has the below balances (Year Ending: December 31, 2010). Using the below accounts and amounts, create a multi-step income statement (Tax Rate = 20%). Big Red had 100,000 shares authorized, 50,000 issued and 40,000 outstanding all year long.

64. Given the following data, create the inventory cost per unit using:

a. full-absorption costing

b. variable costing

Direct labor per part = $ 5.00

Direct materials per part = $ 3.00

Selling and Administration per part = $ 10.00

Shop Overhead per part = $ 15.00

Answers:

65. Given the below data, create the inventory cost per unit using

a. full-absorption costing.

b. variable costing.

c. throughput costing.

Direct labor per part = $10.00

Direct materials per part = $ 6.00

Selling and Administration per part = $ 5.00

Shop Overhead per part = $ 30.00

Answers:

c.

Direct Materials $6.00