Accounting What the Numbers Mean 11th
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Chapter 09
The Income Statement and the Statement of Cash Flows
Multiple Choice Questions
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.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9-1
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 for a period equal the revenues for 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. 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.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9-2
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 ever included in the calculation for Gross Profit?
A. Revenues.
B. Cost of Goods Sold.
C. Net Sales.
D. General and Selling Expenses.
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. a physical inventory must be taken in order to estimate the cost of goods sold.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9-3
10. Income from operations is:
A. sometimes called the "bottom line."
B. sometimes used in the ROI calculation.
C. usually used 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 outstanding 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
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9-4
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.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9-5
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:
A. be added to net income because this represents earned revenues that have not been collected.
B. be subtracted from net income because this represents earned revenue provided by operating earnings.
C. be added to net income because this means that revenues were less than cash collected.
D. be subtracted from net income because this means that revenues were more than 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 2016 from the sale of subscriptions of a magazine to be published in 2017.
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.
E. None of the above.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9-6
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 nota 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 notbe reported on a single step income statement?
A. Net sales
B. Income from operations
C. Income before taxes
D. Net income
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9-7
24. Which of the following statements is trueregarding 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.
Essay Questions
25. 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?
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9-8
26. Sparkle Cleaners, Inc., had net income of $258,025 for its fiscal year ended September 30, 2017. 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 2017 fiscal year.
27. Norman's Cabinet, Inc., had net income of $213,400 for its fiscal year ended October 31, 2017. 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 2017 fiscal year.
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9-9
28. Gwinnett Park Co. reported net income of $253,300 for its fiscal year ended September 30, 2017. At the beginning of that year, 150,000 shares of common stock were outstanding. On February 1, 2017, an additional 30,000 shares were issues. On September 1, 2017, 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, 2017.
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9-10
29. Use the appropriate information from the data provided below to calculate operating income for the year ended December 31, 2017.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9-11
Research and development expenses $22,000 Loss from discontinued operations 8,000 Provision for income taxes 17,000 Net sales 255,000 Interest expense 18,000 Net cash provided by operations 38,000 Gross profit 73,000 Selling, general and administrative expenses 15,000 Accounts receivable 34,000
30. Use the appropriate information from the data provided below to calculate operating income for the year ended December 31, 2017.
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9-12
Cost of goods sold $234,000 General and administrative expenses 96,000 Net cash provided by financing activities 138,000 Dividends paid 32,000 Income tax expense 22,000 Other selling expenses 52,000 Net sales 556,000 Advertising expense 78,000 Accounts payable 66,000
31. Use the appropriate information from the data provided below to calculate the net cash provided (used) by operating activities for the period.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9-13
Net income $113,000 Accounts receivable increase (for the period) 24,000 Inventory decrease (for the period) 19,000 Proceeds from the issuance of longterm debt 260,000 Accounts payable decrease (for the period) 11,000 Purchases of equipment 175,000 Depreciation and amortization expense 42,000
32. Presented below is a partially completed balance sheet for Baldin, Inc., at December 31, 2017, together with comparative data for the year ended December 31, 2016. From the Statement of Cash Flows for the year ended December 31, 2017, you determine that:
• Net income for the year ended December 31, 2017, was $106,000.
• Dividends paid during the year ended December 31, 2017, were $42,000.
• Accounts receivable increased $14,000 during the year ended December 31, 2017.
• The cost of new buildings acquired during 2017, was $85,000.
• No buildings were disposed of during 2017.
• The land account was not affected by any transactions during the year, but the fair value of the land at December 31, 2017, is $210,000.
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9-14
BALDIN, INC. Balance Sheets December 31, 2017, and 2016 Assets 2017 2016 Current assets: Cash $29,000 $33,000 Accounts receivable 112,000 Inventory 167,000 184,000 Total current assets $ $329,000 Land 145,000 Buildings 340,000 Less: Accumulated depreciation (185,000) (165,000) Total land and buildings 320,000 Total assets $ $649,000 Liabilities Current liabilities: Note payable $135,000 $119,000 Accounts payable 207,000 Total current liabilities $309,000 $326,000 Long-term debt 86,000 Stockholders' Equity Common stock $80,000 70,000
Required:
(a.) Complete the December 31, 2017, balance sheet.
(b.) Prepare a statement of cash flows for the year ended December 31, 2017.
9-15
without
Retained earnings 167,000 Total stockholders' equity $ $237,000 Total liabilities and stockholders' equity $ $649,000
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution
the prior written consent of McGraw-Hill Education.
Chapter 09 The Income Statement and the Statement of Cash Flows Answer Key
Multiple Choice Questions
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.
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNReporting
Accessibility:KeyboardNavigation
Blooms:Remember
Difficulty:1Easy
LearningObjective:09-01Explainwhatrevenueisandwhatthetwocriteriaarethatpermitrevenuerecognition.
Topic:Revenues
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.
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNReporting
Accessibility:KeyboardNavigation
Blooms:Remember
Difficulty:2Medium
LearningObjective:09-01Explainwhatrevenueisandwhatthetwocriteriaarethatpermitrevenuerecognition.
Topic:Revenues
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9-16
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.
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNMeasurement
Accessibility:KeyboardNavigation
Blooms:Remember
Difficulty:2Medium
LearningObjective:09-01Explainwhatrevenueisandwhatthetwocriteriaarethatpermitrevenuerecognition.
Topic:Revenues
4. The concept of matching revenue and expense refers to the fact that:
A. expenses for a period equal the revenues for 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. costs incurred in the process of earning revenues during a period are deferred and expensed in a future period.
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNDecisionMaking
Accessibility:KeyboardNavigation
Blooms:Understand
Difficulty:1Easy
LearningObjective:09-01Explainwhatrevenueisandwhatthetwocriteriaarethatpermitrevenuerecognition.
Topic:Revenues
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9-17
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.
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNDecisionMaking
Accessibility:KeyboardNavigation
Blooms:Remember
Difficulty:2Medium
LearningObjective:09-01Explainwhatrevenueisandwhatthetwocriteriaarethatpermitrevenuerecognition.
Topic:Revenues
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.
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNDecisionMaking
Accessibility:KeyboardNavigation
Blooms:Remember
Difficulty:2Medium
LearningObjective:09-01Explainwhatrevenueisandwhatthetwocriteriaarethatpermitrevenuerecognition.
Topic:Revenues
9-18
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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.
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNDecisionMaking
Accessibility:KeyboardNavigation
Blooms:Understand
Difficulty:2Medium
LearningObjective:09-03Discussthesignificanceofgrossprofitanddescribehowthegrossprofitratioiscalculated andused.
Topic:GrossProfit
8. Which of the following accounts/captions are not ever included in the calculation for Gross Profit?
A. Revenues.
B. Cost of Goods Sold.
C. Net Sales.
D. General and Selling Expenses.
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNDecisionMaking
Accessibility:KeyboardNavigation
Blooms:Remember
Difficulty:1Easy
LearningObjective:09-03Discussthesignificanceofgrossprofitanddescribehowthegrossprofitratioiscalculated andused.
Topic:GrossProfit
9-19
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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. a physical inventory must be taken in order to estimate the cost of goods sold.
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AICPA:BBCriticalThinking
AICPA:FNMeasurement
Accessibility:KeyboardNavigation
Blooms:Remember
Difficulty:2Medium
LearningObjective:09-02Describehowcostofgoodssoldisdeterminedunderbothperpetualandperiodicinventory accountingsystems.
Topic:CostofGoodsSold
10. Income from operations is:
A. sometimes called the "bottom line."
B. sometimes used in the ROI calculation.
C. usually used in the ROE calculation.
D. usually calculated after income tax expense.
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AICPA:BBCriticalThinking
AICPA:FNDecisionMaking
Accessibility:KeyboardNavigation
Blooms:Remember
Difficulty:2Medium
LearningObjective:09-05Explainwhat“incomefromoperations”includesanddiscusswhythisincomestatement subtotalissignificanttomanagersandfinancialanalysts.
Topic:IncomefromOperations
9-20
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
11. The earnings per share of common stock calculation:
A. is made by dividing net income by the number of shares of common stock outstanding 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.
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNMeasurement
Accessibility:KeyboardNavigation
Blooms:Understand
Difficulty:2Medium
LearningObjective:09-06Describethecomponentsoftheearningspersharecalculationanddiscussthereasonsfor someoftherefinementsmadeinthatcalculation.
Topic:EarningsperShare
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% ($360 - $270)/$360 = 25%
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Blooms:Apply
Difficulty:2Medium
LearningObjective:09-03Discussthesignificanceofgrossprofitanddescribehowthegrossprofitratioiscalculated andused.
Topic:GrossProfit
9-21
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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
Selling Price = Cost of product/(1 - Desired gross profit ratio) = $120/80% = $150
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Difficulty:3Hard
LearningObjective:09-03Discussthesignificanceofgrossprofitanddescribehowthegrossprofitratioiscalculated andused.
Topic:GrossProfit
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.
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNMeasurement
Accessibility:KeyboardNavigation
Blooms:Remember
Difficulty:1Easy
LearningObjective:09-01Explainwhatrevenueisandwhatthetwocriteriaarethatpermitrevenuerecognition.
Topic:Revenues
9-22
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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.
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AICPA:BBCriticalThinking
AICPA:FNReporting
Accessibility:KeyboardNavigation
Blooms:Remember
Difficulty:2Medium
LearningObjective:09-10Illustratethedifferencebetweenthedirectandindirectmethodsofpresentingcashflowsfrom operatingactivities.
Topic:DirectandIndirectMethodsofPresentation
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.
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNReporting
Accessibility:KeyboardNavigation
Blooms:Understand
Difficulty:2Medium
LearningObjective:09-09Describethepurposeandoutlinethegeneralformatofthestatementofcashflows.
Topic:StatementofCashFlows
9-23
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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.
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AICPA:FNDecisionMaking
Accessibility:KeyboardNavigation
Blooms:Understand
Difficulty:2Medium
LearningObjective:09-09Describethepurposeandoutlinethegeneralformatofthestatementofcashflows.
Topic:StatementofCashFlows
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:
A. be added to net income because this represents earned revenues that have not been collected.
B. be subtracted from net income because this represents earned revenue provided by operating earnings.
C. be added to net income because this means that revenues were less than cash collected.
D. be subtracted from net income because this means that revenues were more than cash collected.
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AICPA:FNReporting
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Blooms:Apply
Difficulty:3Hard
LearningObjective:09-09Describethepurposeandoutlinethegeneralformatofthestatementofcashflows.
Topic:StatementofCashFlows
9-24
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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 2016 from the sale of subscriptions of a magazine to be published in 2017.
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNDecisionMaking
Accessibility:KeyboardNavigation
Blooms:Apply
Difficulty:3Hard
LearningObjective:09-01Explainwhatrevenueisandwhatthetwocriteriaarethatpermitrevenuerecognition.
Topic:Revenues
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.
E. None of the above.
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AICPA:FNDecisionMaking
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Blooms:Understand
Difficulty:2Medium
LearningObjective:09-01Explainwhatrevenueisandwhatthetwocriteriaarethatpermitrevenuerecognition.
Topic:Revenues
9-25
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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.
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNDecisionMaking
Accessibility:KeyboardNavigation
Blooms:Understand
Difficulty:2Medium
LearningObjective:09-01Explainwhatrevenueisandwhatthetwocriteriaarethatpermitrevenuerecognition.
Topic:Revenues
22. Which of the following is nota 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
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNReporting
Accessibility:KeyboardNavigation
Blooms:Understand
Difficulty:1Easy
LearningObjective:09-04Identifytheprincipalcategoriesandcomponentsof“otheroperatingexpenses”andshowhow theseitemsarereportedontheincomestatement.
Topic:OperatingExpenses
9-26
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23. Which of the following captions would be notbe reported on a single step income statement?
A. Net sales
B. Income from operations
C. Income before taxes
D. Net income
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Blooms:Understand
Difficulty:2Medium
LearningObjective:09-07Compareandcontrastthealternativeincomestatementpresentationmodels.
Topic:IncomeStatementPresentationAlternatives
24. Which of the following statements is trueregarding 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.
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNReporting
Accessibility:KeyboardNavigation
Blooms:Understand
Difficulty:2Medium
LearningObjective:09-08Discussthemeaningandsignificanceofeachoftheunusualorinfrequentlyoccurringitems thatmayappearontheincomestatement.
Topic:UnusualorInfrequentlyOccurringItems
9-27
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Essay Questions
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9-28
25. 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?
cost = $55.00 selling price * 58% cost of goods sold ratio = $31.90 per unit
This is the maximum manufacturing cost per unit that can be incurred without reducing the company's overall gross profit ratio, assuming that the maximum selling price of the new product is $55.00 per unit and the minimum desired gross profit ratio is 42%.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9-29
Net sales $300,000 100.0% Cost of goods sold 174,000 58.0% Gross profit $126,000 42.0% Gross
Cost of goods sold
Selling price $55.00 100.0% Cost to manufacture ? 58.0% Gross profit $? 42.0% Manufacturing
profit ratio = $126,000/$300,000 = 42.0%
ratio = $174,000/$300,000 = 58.0%
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNReporting
Blooms:Apply
Difficulty:2Medium
LearningObjective:09-03Discussthesignificanceofgrossprofitanddescribehowthegrossprofitratioiscalculated andused.
Topic:GrossProfit
26. Sparkle Cleaners, Inc., had net income of $258,025 for its fiscal year ended September 30, 2017. 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 2017 fiscal year.
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNReporting
Blooms:Apply
Difficulty:2Medium
LearningObjective:09-06Describethecomponentsoftheearningspersharecalculationanddiscussthereasonsfor someoftherefinementsmadeinthatcalculation.
Topic:EarningsperShare
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9-30
Net income $258,025 Less: Preferred stock dividends (12,000 * $50 * .08) (48,000) Net income available to common stockholders $210,025 Common shares outstanding 135,500 Earnings per share $1.55
27. Norman's Cabinet, Inc., had net income of $213,400 for its fiscal year ended October 31, 2017. 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 2017 fiscal year.
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNReporting
Blooms:Apply
Difficulty:2Medium
LearningObjective:09-06Describethecomponentsoftheearningspersharecalculationanddiscussthereasonsfor someoftherefinementsmadeinthatcalculation.
Topic:EarningsperShare
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9-31
Net income $213,400 Less: Preferred stock dividends (26,500 * $60 * .09) (143,100) Net income available to common stockholders $70,300 Common shares outstanding 37,000 Earnings per share $1.90
28 . Gwinnett Park Co. reported net income of $253,300 for its fiscal year ended September 30, 2017. At the beginning of that year, 150,000 shares of common stock were outstanding. On February 1, 2017, an additional 30,000 shares were issues. On September 1, 2017, 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, 2017.
Weighted-average number of shares of common stock outstanding during the fiscal year ended September 30, 2017:
150,000 shares * 4/12 = 50,000
180,000 shares * 7/12 = 105,000
168,000 shares * 1/12 = 14,000
Weighted-Average Shares Outstanding 169,000
Preferred stock dividends requirement for the fiscal year ended September 30, 2017:
7,000 shares outstanding during entire year * .08 * $60 par value = $33,600
Basic earnings per share = of common stock
= ($253,300 - $33,600)/169,000 = $1.30 per share
Net income - Preferred stock dividends
Weighted-average shares of common stock outstanding
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNReporting
Blooms:Analyze
Difficulty:3Hard
LearningObjective:09-06Describethecomponentsoftheearningspersharecalculationanddiscussthereasonsfor someoftherefinementsmadeinthatcalculation.
Topic:EarningsperShare
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9-32
29. Use the appropriate information from the data provided below to calculate operating income for the year ended December 31, 2017.
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNReporting
Blooms:Apply
Difficulty:2Medium
LearningObjective:09-05Explainwhat“incomefromoperations”includesanddiscusswhythisincomestatement subtotalissignificanttomanagersandfinancialanalysts.
Topic:IncomefromOperations
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9-33
Research and development expenses $22,000 Loss from discontinued operations 8,000 Provision for income taxes 17,000 Net sales 255,000 Interest expense 18,000 Net cash provided by operations 38,000 Gross profit 73,000 Selling, general and administrative expenses 15,000 Accounts receivable 34,000 Net sales $255,000 Cost of goods sold (182,000) Gross profit 73,000 Selling, general and administrative expenses (15,000) Research and development expenses (22,000) Operating income $36,000
30. Use the appropriate information from the data provided below to calculate operating income for the year ended December 31, 2017.
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNReporting
Blooms:Apply
Difficulty:2Medium
LearningObjective:09-05Explainwhat“incomefromoperations”includesanddiscusswhythisincomestatement subtotalissignificanttomanagersandfinancialanalysts.
Topic:IncomefromOperations
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9-34
Cost of goods sold $234,000 General and administrative expenses 96,000 Net cash provided by financing activities 138,000 Dividends paid 32,000 Income tax expense 22,000 Other selling expenses 52,000 Net sales 556,000 Advertising expense 78,000 Accounts payable 66,000 Net sales $556,000 Cost of goods sold (234,000) Gross profit 322,000 Advertising expense (78,000) Other selling expenses (52,000) General and administrative expenses (96,000) Operating income $96,000
31. Use the appropriate information from the data provided below to calculate the net cash provided (used) by operating activities for the period.
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNReporting
Blooms:Apply
Difficulty:2Medium
LearningObjective:09-10Illustratethedifferencebetweenthedirectandindirectmethodsofpresentingcashflowsfrom operatingactivities.
Topic:DirectandIndirectMethodsofPresentation
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9-35
Net income $113,000 Accounts receivable increase (for the period) 24,000 Inventory decrease (for the period) 19,000 Proceeds from the issuance of longterm debt 260,000 Accounts payable decrease (for the period) 11,000 Purchases of equipment 175,000 Depreciation and amortization expense 42,000 Net income $113,000 Add (deduct) items not affecting cash: Depreciation and amortization expense 42,000 Accounts receivable increase (24,000) Inventory decrease 19,000 Accounts payable decrease (11,000) Net cash provided by operating activities $139,000
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9-36
32. Presented below is a partially completed balance sheet for Baldin, Inc., at December 31, 2017, together with comparative data for the year ended December 31, 2016. From the Statement of Cash Flows for the year ended December 31, 2017, you determine that:
• Net income for the year ended December 31, 2017, was $106,000.
• Dividends paid during the year ended December 31, 2017, were $42,000.
• Accounts receivable increased $14,000 during the year ended December 31, 2017.
• The cost of new buildings acquired during 2017, was $85,000.
• No buildings were disposed of during 2017.
• The land account was not affected by any transactions during the year, but the fair value of the land at December 31, 2017, is $210,000.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
9-37
BALDIN, INC. Balance Sheets December 31, 2017, and 2016 Assets 2017 2016 Current assets: Cash $29,000 $33,000 Accounts receivable 112,000 Inventory 167,000 184,000 Total current assets $ $329,000 Land 145,000 Buildings 340,000 Less: Accumulated depreciation (185,000) (165,000) Total land and buildings 320,000 Total assets $ $649,000 Liabilities Current liabilities: Note payable $135,000 $119,000 Accounts payable 207,000 Total current liabilities $309,000 $326,000 Long-term debt 86,000 Stockholders' Equity
Required:
(a.) Complete the December 31, 2017, balance sheet.
(b.) Prepare a statement of cash flows for the year ended December 31, 2017.
(a.)
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©
Education. All rights reserved. No reproduction or distribution without the prior written consent of
Education. Common stock $80,000 70,000 Retained earnings 167,000 Total stockholders' equity $ $237,000 Total liabilities and stockholders' equity $ $649,000
Copyright
2017 McGraw-Hill
McGraw-Hill
BALDIN, INC. Balance Sheets December 31, 2017, and 2016 Assets 2017 2016 Current assets: Cash $29,000 $33,000 Accounts receivable (1) 112,000 Inventory 167,000 184,000 Total current assets $(2) $329,000 Land (3) 145,000 Buildings (4) 340,000 Less: Accumulated depreciation (185,000) (165,000) Total land and buildings (5) 320,000 Total assets $(6) $649,000 Liabilities Current liabilities: Note payable $135,000 $119,000
(1.) $112,000 + $14,000 = $126,000
(2.) $29,000 + $126,000 + $167,000 = $322,000
(3.) Land is carried at historical cost = $145,000
(4.) $340,000 + $85,000 = $425,000
(5.) $145,000 + $425,000 - $185,000 = $385,000
(6.) $322,000 + $385,000 = $707,000
(7.) $309,000 - $135,000 = $174,000
(8.) Same as total assets = $707,000
(9.) $167,000 + $106,000 - $42,000 = $231,000
(10.) $80,000 + $231,000 = $311,000
(11.) $707,000 - $311,000 - $309,000 = $87,000 plug figure.
(b.)
BALDIN, INC.
Statement of Cash Flows
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Accounts payable (7) 207,000 Total current liabilities $309,000 $326,000 Long-term debt (11) 86,000 Stockholders' Equity Common stock $80,000 70,000 Retained earnings (9) 167,000 Total stockholders' equity $(10) $237,000 Total liabilities and stockholders'
$(8) $649,000
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
equity
For the year ended December 31, 2017 Cash flows from operating activities: Net income $106,000 Add (deduct) items not affecting cash: Depreciation expense 20,000 Increase in accounts receivable (14,000) Decrease in inventory 17,000
AACSB:AnalyticalThinking
AICPA:BBCriticalThinking
AICPA:FNReporting
Blooms:Analyze
Difficulty:3Hard
LearningObjective:09-09Describethepurposeandoutlinethegeneralformatofthestatementofcashflows.
LearningObjective:09-10Illustratethedifferencebetweenthedirectandindirectmethodsofpresentingcashflowsfrom operatingactivities.
Topic:DirectandIndirectMethodsofPresentation
Topic:StatementofCashFlows
9-40
distribution without the prior
Increase in notes payable 16,000 Decrease in accounts payable (33,000) Net cash provided by operating activities $112,000 Cash flows from investing activities: Cash paid to acquire new buildings (85,000)
flows
financing activities: Cash paid to acquire new buildings $1,000 Cash received from issuance of common stock 10,000 Payment of cash dividends on common stock (42,000) Net cash used by financing activities $(31,000) Net decrease in cash for the year $(4,000)
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or
written consent of McGraw-Hill Education.
Cash
from
