Question 1

Which of the following would appear first in a statement of retained earnings? A) Net income. B) Prior period adjustment. C) Cash dividends. D) Share dividends. ^P67. A correction of an error in prior periods' income will be reported

Accepted Answer

Prior period adjustments are adjustments made to correct errors in the financial statements of previous periods. They are reported before the current period's net income and dividends in the statement of retained earnings to adjust the opening balance of retained earnings.

Question 2

Prior years income statements are not restated for
A) changes in accounting principle.
B) changes in estimates.
C) corrections of errors.
D) All of these answer choices are correct.

Accepted Answer

Changes in estimates are not restated in prior years' income statements. Instead, the effects of changes in estimates are accounted for prospectively, in the period of change and future periods if the change affects both. Changes in accounting principles and corrections of errors, however, typically require restatement of prior periods to reflect the retrospective application of the new accounting principle or to correct the errors.

Question 3

A change in accounting principle requires what kind of adjustment to the financial statements?
A) Current period adjustment.
B) Prospective adjustment.
C) Retrospective adjustment.
D) Current and prospective adjustment.

Accepted Answer

A change in accounting principle requires a retrospective adjustment, which means adjusting the financial statements for all prior periods presented as if the new accounting principle had always been used. This ensures that the financial statements are comparable over time.

Question 4

The earnings per share computation is not required for
A) Net income.
B) Gain on disposal of discontinued operation, net of tax.
C) Income from continuing operations.
D) Income from operations.

Accepted Answer

Earnings per share (EPS) is typically calculated for net income, income from continuing operations, and gain on disposal of discontinued operations, but not specifically for income from operations.

Question 5

Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business?
A) The gain or loss on disposal should be reported as an other income item.
B) Results of operations of a discontinued component should be disclosed immediately below income from operations.
C) Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement.
D) The gain or loss on disposal should not be segregated, but should be reported together with the results of continuing operations.

Accepted Answer

Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement to provide clear information to investors about the impact of discontinued operations.

Question 6

Companies use intraperiod tax allocation for all of the following items except
A) discontinued operations.
B) prior period adjustments.
C) changes in accounting estimates.
D) income from continuing operations.

Accepted Answer

Intraperiod tax allocation is not used for changes in accounting estimates, as these changes do not involve tax effects that need to be allocated within the financial statements.

Question 7

Which of the following is true about intraperiod tax allocation?
A) It arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return.
B) It is required for the cumulative effect of accounting changes but not for prior period adjustments.
C) Its purpose is to allocate income tax expense evenly over a number of accounting periods.
D) Its purpose is to relate the income tax expense to the items which affect the amount of tax.

Accepted Answer

Intraperiod tax allocation is the process of relating income tax expense to the items that affect the amount of tax. It ensures that the tax expense is allocated correctly within the income statement. The other options (A, B, and C) do not accurately describe the purpose or requirement of intraperiod tax allocation.

Question 8

Given the following income statement line items:
Income from operations
Income before income taxes
Income from continuing operations
Income from discontinued operations
Net income
How many earnings per share amounts are required to be disclosed?
A) 5
B) 4
C) 3
D) 2

Accepted Answer

Publicly traded companies are required to disclose basic and diluted earnings per share (EPS) for (1) income from continuing operations and (2) net income. Therefore, at least two EPS amounts are required. Income from discontinued operations is included in the calculation of net income, so it does not require a separate EPS disclosure.

Question 9

Which of the following is not an acceptable way of displaying the components of other comprehensive income?
A) Combined statement of retained earnings.
B) Second income statement.
C) Combined statement of comprehensive income.
D) All of the above are acceptable.

Accepted Answer

Other comprehensive income should be displayed separately from retained earnings, so a combined statement of retained earnings which includes other comprehensive income is not acceptable. B and C are acceptable ways of displaying other comprehensive income.

Question 10

Which of the following is included in comprehensive income?
A) Investments by owners.
B) Unrealized gains on non-trading equity securities.
C) Distributions to owners.
D) Changes in accounting principles.

Accepted Answer

Comprehensive income includes all changes in equity during a period except those resulting from investments by owners or distributions to owners. Unrealized gains on non-trading equity securities are one type of other comprehensive income that is included in comprehensive income. Changes in accounting principles are also included in comprehensive income.

Question 11

Undeclared dividends are deducted from net income in the earnings per share computation for which type of preference shares?
A) Non-cumulative only.
B) Cumulative only.
C) Neither non-cumulative nor cumulative.
D) Both non-cumulative and cumulative.

Accepted Answer

Undeclared dividends are deducted from net income in the earnings per share computation for cumulative preference shares, as they accumulate and must be paid before any dividends can be paid to common shareholders. Non-cumulative preference shares do not have this requirement, as any missed dividends do not accumulate and are not required to be paid at a later time. Therefore, undeclared dividends are not deducted from net income for non-cumulative preference shares.

Question 12

Watts Corporation made a very large arithmetical error in the preparation of its year-end financial statements by improper placement of a decimal point in the calculation of depreciation. The error caused the net income to be reported at almost double the proper amount. Correction of the error when discovered in the next year should be treated as
A) an increase in depreciation expense for the year in which the error is discovered.
B) a component of income for the year in which the error is discovered, but separately listed on the income statement and fully explained in a note to the financial statements.
C) an other expense item for the year in which the error was made.
D) a prior period adjustment.

Accepted Answer

Correction of the error when discovered in the next year should be treated as a prior period adjustment. This is because the error affects a previous period's financial statements and therefore needs to be adjusted in the prior period's financial statements. Prior period adjustments are reported in the statement of retained earnings, not the income statement, and are fully explained in a note to the financial statements.

Question 13

In 2019, Milford Corporation determined that it overstated salaries payable and salaries expense by $20,000 in 2018. In 2019, which of the following accounts will have to be credited to correct this error?
A) Salaries and Wages Payable.
B) Salaries and Wages Expense.
C) Retained Earnings.
D) Income Summary.

Accepted Answer

To correct an overstatement of expenses from a prior period, the correction is made through Retained Earnings. This is because the error affects the net income of a previous year, which has already been closed to Retained Earnings.

Question 14

Changes in estimates affect reported amounts
A) retrospectively only.
B) prospectively only.
C) currently and prospectively.
D) currently and retrospectively.

Accepted Answer

Changes in estimates are accounted for in the period of change and future periods if the change affects both. This means they affect financial statements currently (in the period of change) and prospectively (in future periods), but not retrospectively.

Question 15

Which of the following does not appear on a statement of retained earnings?
A) Net loss.
B) Prior period adjustments.
C) Preference share dividends.
D) Other comprehensive income.

Accepted Answer

Other comprehensive income appears on the statement of comprehensive income, not on the statement of retained earnings.

Question 16

Earnings per share relate to
A) preference shares only.
B) ordinary shares only.
C) both preference and ordinary shares.
D) neither preference nor ordinary shares.

Accepted Answer

Earnings per share (EPS) is a measure of a company's profitability that is calculated by dividing net income by the number of outstanding ordinary shares. It only relates to ordinary shares, not preference shares.

Question 17

A change in accounting principle requires that the cumulative effect of the change for prior periods be shown as an adjustment to
A) beginning retained earnings for the earliest period presented.
B) net income for the period in which the change occurred.
C) comprehensive income for the earliest period presented.
D) stockholders' equity for the period in which the change occurred.

Accepted Answer

A change in accounting principle requires retrospective application, which means the adjustment is made to the beginning balance of retained earnings for the earliest period presented. This adjustment reflects the cumulative effect of the change on prior periods. It is important to note that this adjustment does not affect the current period's net income.

Question 18

When a company discontinues an operation and disposes of the discontinued operation (component), the transaction should be included in the income statement as a gain or loss on disposal reported as A) a prior period adjustment. B) an other income and expense item. C) an amount after continuing operations and before net income. D) a bulk sale of plant assets included in income from continuing operations. ^S56. Gains or losses on the disposal of investments should be shown in the income statement

Accepted Answer

Gains or losses from the disposal of a discontinued operation are reported in the income statement separately from continuing operations, specifically after income from continuing operations and before net income. This allows users of the financial statements to distinguish between the results of ongoing operations and the effects of disposals.

Question 19

Which of the following items will not appear in the retained earnings statement?
A) Net loss.
B) Prior period adjustment.
C) Discontinued operations.
D) Dividends.

Accepted Answer

The retained earnings statement only reflects changes to the company's earnings that have been retained and reinvested into the business. Discontinued operations are not a part of the ongoing operations of the company and therefore will not impact the retained earnings balance. Net loss, prior period adjustments, and dividends are all factors that can impact the balance of retained earnings and should appear on the statement.

Question 20

Income taxes are allocated to
A) continuing operations.
B) discontinued operations.
C) prior period adjustments.
D) All of these answers are correct.

Accepted Answer

Income taxes are allocated to continuing operations, discontinued operations, and prior period adjustments, as they affect all these areas of financial reporting.

Quiz 4: Income Statement and Related Information

Which of the following would appear first in a statement of retained earnings?

Prior years income statements are not restated for

A change in accounting principle requires what kind of adjustment to the financial statements?

The earnings per share computation is not required for

Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business?

Companies use intraperiod tax allocation for all of the following items except

Which of the following is true about intraperiod tax allocation?

Given the following income statement line items: Income from operations Income before income taxes Income from continuing operations Income from discontinued operations Net income How many earnings per share amounts are required to be disclosed?

Which of the following is not an acceptable way of displaying the components of other comprehensive income?

Which of the following is included in comprehensive income?

Undeclared dividends are deducted from net income in the earnings per share computation for which type of preference shares?

In 2019, Milford Corporation determined that it overstated salaries payable and salaries expense by $20,000 in 2018. In 2019, which of the following accounts will have to be credited to correct this error?

Changes in estimates affect reported amounts

Which of the following does not appear on a statement of retained earnings?

Earnings per share relate to

A change in accounting principle requires that the cumulative effect of the change for prior periods be shown as an adjustment to

When a company discontinues an operation and disposes of the discontinued operation (component) , the transaction should be included in the income statement as a gain or loss on disposal reported as

Which of the following items will not appear in the retained earnings statement?

Income taxes are allocated to