The Income Statement and the Complete Test Bank Chapter 9

Accounting - What the Numbers Mean, 12e (Marshall)

Chapter 9 The Income Statement and the Statement of Cash Flows

1) The first caption in most income statements in annual reports is:

A) gross sales.

B) net sales.

C) earned revenues.

D) sales, less sales returns and allowances.

2) Gains differ from revenues because gains:

A) are not a result of the entity's ongoing, central operations.

B) do not have to be realized.

C) are reported as income from operating activities.

D) do not involve any offsetting costs or expenses.

3) Under most circumstances, in order to recognize revenue:

A) cash must have been received.

B) the entity must expect to receive cash in the future.

C) the entity must have paid for all expenses incurred in generating the revenue.

D) the revenue must be realized or realizable, and earned.

4) The concept of matching revenue and expense refers to the fact that:

A) expenses incurred during a period equal the revenues earned during the period.

B) all costs incurred in the process of earning revenues during a period are recorded as expenses in that period.

C) all cash disbursements during a period are subtracted from all cash receipts during the period.

D) all costs incurred in the process of earning revenues during a period are deferred and expensed in a future period.

5) Most entities satisfy the accounting criteria for recognizing revenue when:

A) an order is received from a customer.

B) cash is received from a customer.

C) an unearned revenue account is credited.

D) a product is delivered or a service is provided.

6) Most entities satisfy the accounting criteria for recognizing an expense when:

A) a commitment is made to purchase a product or service.

B) cash is paid to a supplier.

C) a cost is incurred in the revenue generating process.

D) a dividend is paid to stockholders.

7) The gross profit ratio is useful to the manager for each of the following purposes except that:

A) it can be used to determine the selling price to set for an item.

B) it can be used to estimate the amount of inventory lost in a fire.

C) it can be used to determine the amount available from a given amount of revenue to cover operating expenses.

D) it can be used to estimate the amount of operating expenses for a period.

8) Which of the following accounts/captions are not included in the calculation of Gross Profit?

A) General and Selling Expenses.

B) Cost of Goods Sold.

C) Net Sales.

D) All of these accounts/captions are included in the calculation of Gross Profit.

9) When the periodic inventory system is used:

A) operating profit from the sale of an item from inventory is known when the item is sold.

B) gross profit from the sale of an item from inventory is known when the item is sold.

C) cost of goods sold can be calculated by subtracting the ending inventory amount from the sum of beginning inventory and net purchases.

D) the inventory account is adjusted on a daily basis throughout the year as inventory items are purchased and sold.

10) Income from operations is:

A) the same thing as net income and sometimes called the "bottom line."

B) sometimes used instead of net income in the ROI calculation.

C) usually used instead of net income in the ROE calculation.

D) usually calculated after income tax expense.

11) The earnings per share of common stock calculation:

A) is made by dividing net income by the number of shares of common stock authorized at the end of the year.

B) is complicated by the declaration of cash dividends during the year.

C) includes gains or losses from treasury stock transactions.

D) is complicated by the presence of preferred stock in the capital structure.

12) An item that cost $270 is sold for $360. The gross profit ratio for this item is:

A) 20%

B) 25%

C) 33.3%

D) 60%

13) An item that cost $120 is to be sold for a price that will yield a gross profit ratio of 20%. The selling price should be:

A) $96

B) $144

C) $150

D) $600

14) Recognition of revenue in accrual accounting requires:

A) that cash be received.

B) only that the amount of cash to be received from the sale of a product or service be known.

C) only that a product be delivered or a service be performed.

D) that the revenue be realized or realizable, and earned.

15) The major difference between the indirect and the direct method of a statement of cash flows appears in which of the following activities section(s)?

A) The investing activities and financing activities sections.

B) The investing activities section only.

C) The operating activities and financing activities sections.

D) The operating activities section only.

16) Which of the following is an accurate statement regarding a statement of cash flows?

A) Only cash items that affect the income statement are included.

B) Only material cash items that affect the income statement are included.

C) All material operating, investing, and financing activities are included.

D) Immaterial financing activities that affect cash do not need to be included.

17) In the statement of cash flows, depreciation and amortization expense is added back to net income because:

A) these expenses do not affect cash, but were subtracted in the determination of net income.

B) these expenses affect investing activities, not operating activities.

C) the cash disbursements for these accrued expenses will be made in a future period.

D) these expenses are recognized for accounting purposes, but they do not represent economic costs.

18) In the statement of cash flows, an increase in the accounts receivable balance from the beginning of the period to the end of the period would be:

A) added to net income because this represents revenues that have been earned but not yet collected.

B) subtracted from net income because this represents revenues that have not yet been earned or provided by investing activities.

C) added to net income because this means that revenues earned and included within net income were less than the cash collected.

D) subtracted from net income because this means that revenues earned and included within net income were more than the cash collected.

19) Revenue may be recognized:

A) from the sale of a company's own common stock.

B) if a company trades inventory at its usual selling price for newspaper advertising.

C) if management believes the market value of land held for future development has increased during the year.

D) in 2019 from the sale of subscriptions of a magazine to be published in 2020.

20) The term "realization" in revenue recognition refers to which of the following?

A) The entity has completed, or substantially completed, the activities it must perform to be entitled to the revenue benefits.

B) The product or service has been exchanged for cash, claims to cash, or an asset that is readily convertible to a known amount of cash or claims to cash.

C) The entity has received an irrevocable order for goods or services.

D) Cash has been received with an irrevocable order for goods or services.

21) The term "earned" in revenue recognition refers to which of the following?

A) The entity has completed, or substantially completed, the activities it must perform to be entitled to the revenue benefits.

B) The product or service has been exchanged for cash, claims to cash, or an asset that is readily convertible to a known amount of cash or claims to cash.

C) The entity has received an irrevocable order for goods or services.

D) Cash has been received with an irrevocable order for goods or services.

22) Which of the following is not a principal category of "Other operating expenses" frequently reported on the income statement?

A) Cost of goods sold

B) Selling expenses

C) General and administrative expenses

D) Research and development expenses

23) Which of the following captions would be not be reported on a single step income statement?

A) Net sales

B) Income from operations

C) Income before taxes

D) Net income

24) Which of the following statements is true regarding the reporting of discontinued operations?

A) The impact that the discontinued operations had on any previous year results is not shown for comparative purposes.

B) The income or loss, net of taxes, of the discontinued operations is reported as a separate component of income from continuing operations.

C) Earnings per share data are not reported separately for discontinued operations.

D) By reporting discontinued operations as a separate item, net of taxes, all of the effects of the discontinued business segment are excluded from the revenues, expenses, gains, and losses of continuing operations.

25) Bluestar University has a fiscal year that ends on June 30. The 2019 summer session of the university runs for 60 days from June 11 through August 9. Total tuition paid by students for the summer session amounted to $240,000. How much revenue should be reflected in the fiscal year ended June 30, 2019?

A) $60,000.

B) $80,000.

C) $120,000.

D) $240,000.

26) Net sales for the year were $325,000 and cost of goods sold was $240,500 for the company's existing products. A new product is presently under development and has an expected selling price of $40 per unit in order to remain competitive with similar products in the marketplace.

The dollar amount of gross profit and the gross profit ratio for the year were:

A) $84,500 and 26%, respectively.

B) $83,500 and 74%, respectively.

C) $240,500 and 74%, respectively.

D) $324,000 and 100%, respectively.

27) Net sales for the year were $325,000 and cost of goods sold was $240,500 for the company's existing products. A new product is presently under development and has an expected selling price of $40 per unit in order to remain competitive with similar products in the marketplace.

What is the maximum cost per unit that can be incurred to manufacture the new product such that the product can be priced at $40 per unit and will not result in a reduction to the company's gross profit ratio?

A) $10.40

B) $20.00

C) $29.60

D) $40.00

28) Sales on account (all are collectible) amounted to $560,000 during 2019. Accounts receivable were $112,000 on January 1, 2019 and $98,000 on December 31, 2019. How much cash was collected from customers during the year ended December 31, 2019?

A) $462,000.

B) $546,000.

C) $560,000.

D) $574,000.

29) Income tax expense for the year was $372,000. Income taxes payable decreased by $34,000 during the year, resulting in an ending balance of $71,000. How much cash was paid for income taxes during the year?

A) $301,000.

B) $338,000.

C) $372,000.

D) $406,000.

30) The net book value of buildings increased by $170,000 during the year. No buildings were sold during the year, and depreciation expense for the year was $55,000. How much cash was paid to purchase buildings during the year?

A) $55,000.

B) $115,000.

C) $170,000.

D) $225,000.

31) Cash collected from customers during the year ended December 31, 2019 amounted to $314,000, and accounts receivable decreased by $42,000 during the year. How much were sales on account for the year ended December 31, 2019? (Assume that no cash sales were made during the year and that all sales on account are collectible.)

A) $230,000.

B) $272,000.

C) $314,000.

D) $356,000.

32) Cash payments for income taxes during the year ended December 31, 2019 were $172,000. Income taxes payable decreased from $61,000 on January 1, 2019 to $44,000 on December 31, 2019. How much was income tax expense for the year ended December 31, 2019?

A) $128,000.

B) $155,000.

C) $172,000.

D) $189,000.

33) Selling, general, and administrative expenses were $80,000; net sales were $390,000; interest expense was $16,000; research and development expenses were $34,000; net cash provided by operating activities was $42,000; income tax expense was $10,000; cost of goods sold was $220,000.

Gross profit for the period was:

A) $56,000.

B) $90,000.

C) $170,000.

D) $390,000.

34) Selling, general, and administrative expenses were $80,000; net sales were $390,000; interest expense was $16,000; research and development expenses were $34,000; net cash provided by operating activities was $42,000; income tax expense was $10,000; cost of goods sold was $220,000.

Operating income for the period was:

A) $30,000.

B) $40,000.

C) $56,000.

D) $98,000.

35) Selling, general, and administrative expenses were $80,000; net sales were $390,000; interest expense was $16,000; research and development expenses were $34,000; net cash provided by operating activities was $42,000; income tax expense was $10,000; cost of goods sold was $220,000.

Net income for the period was:

A) $30,000.

B) $40,000.

C) $56,000.

D) $72,000.

36) Net income was $240,000 for the year. Throughout the year the company had outstanding 12,000 shares of 6%, $50 par value preferred stock and 75,000 shares of common stock. Basic earnings per share of common stock for the year were:

A) $2.34

B) $2.72

C) $3.20

D) $3.68

37) Net income was $40,000; accounts receivable decreased by $10,000; inventory increased by $3,000; proceeds from the issuance of long-term debt were $22,500; equipment purchases were $75,000; depreciation expense was $16,000. The net cash provided (used) by operating activities for the period was:

A) $10,500.

B) $47,000.

C) $49,000.

D) $63,000.

38) Net sales for the year were $300,000 and cost of goods sold was $174,000 for the company's existing products. A new product is presently under development and has an expected selling price of not more than $55 per unit in order to remain competitive with similar products in the marketplace.

Required:

(a.) Calculate gross profit and the gross profit ratio for the year.

(b.) What is the maximum cost per unit that can be incurred to manufacture the new product so that the product can be priced competitively and will not result in a reduction to the company's gross profit ratio?

39) Sparkle Cleaners, Inc., had net income of $258,025 for its fiscal year ended September 30, 2020. During the year, the company had outstanding 12,000 shares of 8%, $50 par value preferred stock, and 135,500 shares of common stock. Calculate the basic earnings per share of common stock for the 2020 fiscal year.

40) Norman's Cabinet, Inc., had net income of $213,400 for its fiscal year ended October 31, 2020. During the year, the company had outstanding 26,500 shares of 9%, $60 par value preferred stock, and 37,000 shares of common stock. Calculate the basic earnings per share of common stock for the 2020 fiscal year.

41) Gwinnett Park Co. reported net income of $253,300 for its fiscal year ended September 30, 2020. At the beginning of that year, 150,000 shares of common stock were outstanding. On February 1, 2020, an additional 30,000 shares were issues. On September 1, 2020, 12,000 shares were purchased as treasury stock. During the year, the company paid the annual dividend on 7,000 shares of its 8%, $60 par value preferred stock that were outstanding during the entire fiscal year. Calculate the basic earnings per share of common stock for the year ended September 30, 2020.

42) Use the appropriate information from the data provided below to calculate operating income for the year ended December 31, 2020.

43) Use the appropriate information from the data provided below to calculate operating income for the year ended December 31, 2020.

44) Use the appropriate information from the data provided below to calculate the net cash provided (used) by operating activities for the period.

45) Presented below is a partially completed balance sheet for Baldin, Inc., at December 31, 2020, together with comparative data for the year ended December 31, 2019. From the Statement of Cash Flows for the year ended December 31, 2020, you determine that:

• Net income for the year ended December 31, 2020, was $106,000.

• Dividends paid during the year ended December 31, 2020, were $42,000.

• Accounts receivable increased $14,000 during the year ended December 31, 2020.

• The cost of new buildings acquired during 2020, was $85,000.

• No buildings were disposed of during 2020.

• The land account was not affected by any transactions during the year,

but the fair value of the land at December 31, 2020, is $210,000.

Required:

(a.) Complete the December 31, 2020, balance sheet.

(b.) Prepare a statement of cash flows for the year ended December 31, 2020.