Question 1

Which of the following would not be included in net income?
A) sales from products and services that occurred during the accounting period
B) an unrealized gain on an available-for-sale debt investment as of the end of the accounting period
C) wages and salaries expense incurred during the accounting period
D) a gain from the disposal of equipment that occurred on the last day of the accounting period

Accepted Answer

Unrealized gains on available-for-sale debt investments are not included in net income; they are reported in other comprehensive income until realized.

Question 2

Which of the following income statement items is considered to be transitory?
A) promotional costs for a new product
B) sales revenue from the general public
C) interest expense on short-term loans
D) income from discontinued operations

Accepted Answer

Income from discontinued operations is considered transitory because it relates to parts of the business that have been sold or are being phased out, and thus will not recur in future periods.

Question 3

Elements of other comprehensive income are primarily permanent in nature.

Accepted Answer

Elements of other comprehensive income are typically temporary and may be reclassified to net income in future periods.

Question 4

Which of the following income statement items is considered to be permanent?
A) gains on disposal of equipment
B) impairment losses
C) interest expense
D) discontinued operations

Accepted Answer

Interest expense is considered a permanent item as it recurs regularly and is part of the ongoing operations of a business.

Question 5

Which statement is true about the computation of net income and comprehensive income?
A) They are the same under either reporting alternative.
B) The one statement format provides a higher net income than the two consecutive statements format.
C) The two consecutive statements format provides a higher net income than the one statement format.
D) Net income always equals comprehensive income under the one statement format.

Accepted Answer

Net income and comprehensive income are computed the same way regardless of whether a one statement or two statement format is used. The difference lies in presentation, not in the computation of the amounts.

Question 6

In what ways is the income statement useful to users?
A) helps users evaluate past performance
B) helps users predict future results
C) helps users assess the risk of future cash flows
D) all of the above

Accepted Answer

The income statement provides information on a company's financial performance, which helps users evaluate past performance, predict future results, and assess the risk of future cash flows.

Question 7

Comprehensive income is comprised of only elements explicitly excluded from net income.

Accepted Answer

Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners, encompassing both net income and other comprehensive income items.

Question 8

The two parts that compose comprehensive income are operating income and net income.

Accepted Answer

Comprehensive income consists of net income and other comprehensive income, not operating income.

Question 9

What is a limitation of the income statement?
A) It has no predictive value.
B) It requires extensive judgement and estimation in order to draw conclusions.
C) It does not allow users to judge risk.
D) It only reports financial standing as of a point in time.

Accepted Answer

The income statement requires extensive judgment and estimation, such as in recognizing revenue and expenses, which can affect the conclusions drawn from it.

Question 10

How does the fact that accounting standards allow managers to exercise their professional judgment when making accounting policy decisions constitute a limitation of the income statement?

Accepted Answer

The answer of How does the fact that accounting standards...

Question 11

In what ways do the accounting standards allow companies to report comprehensive income in the financial statements?

Accepted Answer

The answer of In what ways do the accounting standards...

Question 12

Other comprehensive income is comprised of elements explicitly excluded from net income.

Accepted Answer

Other comprehensive income includes items that are not included in net income, such as unrealized gains and losses on certain investments, foreign currency translation adjustments, and pension plan gains or losses.

Question 13

The "big bath" earnings management technique involves increasing an expected net loss so as to report an even larger net loss.

Accepted Answer

The "big bath" technique involves manipulating financial statements to make a bad year look even worse, allowing future performance to appear better by comparison.

Question 14

Most elements of operating income are permanent in nature.

Accepted Answer

The answer of Most elements of operating income are permanent...

Question 15

Which of the following would be included in net income?
A) an unrealized gain on an available-for-sale debt investment as of the end of the accounting period
B) a gain from the disposal of equipment that occurred on the last day of the accounting period
C) an unrealized gain as a result of a foreign currency translation adjustment
D) an unrealized loss on an available-for-sale debt investment as of the end of the accounting period

Accepted Answer

A gain from the disposal of equipment is a realized gain and is included in net income. Unrealized gains or losses on available-for-sale securities and foreign currency translation adjustments are typically reported in other comprehensive income, not net income.

Question 16

Which of the following is considered to be a limitation of income statements?
A) Income statements depend on accounting methods selected.
B) Income statements evaluate past performance.
C) Income statements assess uncertainties of achieving future cash flows.
D) Income statements predict future performance.

Accepted Answer

Income statements can vary based on the accounting methods chosen, such as FIFO or LIFO for inventory, which can affect the reported income.

Question 17

Morton Company has the following transactions in the current year. Assuming that all of the transactions are material, which of them will most likely have no effect on current year net income?
A) advance in technology that renders certain inventory items obsolete
B) retirement of callable bonds at a premium
C) sale of used equipment that had been fully depreciated in prior years
D) increase in the fair value of certain available-for-sale securities held as an investment

Accepted Answer

The answer of Morton Company has the following transactions in...

Question 18

Comprehensive income may be reported in the financial statements in either of two formats.

Accepted Answer

Comprehensive income can be reported either in a single continuous statement of comprehensive income or in two separate but consecutive statements: an income statement and a statement of comprehensive income.

Question 19

The "cookie jar reserves" earnings management technique involves increasing earnings in the current period so as to increase managers' compensation.

Accepted Answer

The "cookie jar reserves" technique involves reducing earnings in the current period by setting aside reserves, which can be used to inflate earnings in future periods, not to increase current period earnings.

Question 20

Which of the following is considered to be a characteristic of the usefulness of income statements?
A) Income statements require judgment.
B) Income statements evaluate past performance.
C) Income statements depend on the accounting methods selected.
D) Income statements exclude unreliable information.

Accepted Answer

Income statements are useful for evaluating past performance as they provide a summary of a company's revenues and expenses over a specific period, helping stakeholders assess how well the company has performed financially.

Quiz 5: Statements of Net Income and Comprehensive Net Income

Which of the following would not be included in net income?

Which of the following income statement items is considered to be transitory?

Elements of other comprehensive income are primarily permanent in nature.

Which of the following income statement items is considered to be permanent?

Which statement is true about the computation of net income and comprehensive income?

In what ways is the income statement useful to users?

Comprehensive income is comprised of only elements explicitly excluded from net income.

The two parts that compose comprehensive income are operating income and net income.

What is a limitation of the income statement?

How does the fact that accounting standards allow managers to exercise their professional judgment when making accounting policy decisions constitute a limitation of the income statement?

In what ways do the accounting standards allow companies to report comprehensive income in the financial statements?

Other comprehensive income is comprised of elements explicitly excluded from net income.

The "big bath" earnings management technique involves increasing an expected net loss so as to report an even larger net loss.

Most elements of operating income are permanent in nature.

Which of the following would be included in net income?

Which of the following is considered to be a limitation of income statements?

Morton Company has the following transactions in the current year. Assuming that all of the transactions are material, which of them will most likely have no effect on current year net income?

Comprehensive income may be reported in the financial statements in either of two formats.

The "cookie jar reserves" earnings management technique involves increasing earnings in the current period so as to increase managers' compensation.

Which of the following is considered to be a characteristic of the usefulness of income statements?