Income Statements

1. Expenses on the income statement may be grouped by:

A. nature, but not by function.
B. function, but not by nature.
C. either function or nature.
2. An example of an expense classification by function is:
A. tax expense.
B. interest expense.
C. cost of goods sold.
3. Denali Limited, a manufacturing company, had the following
income statement information:
Revenue $4,000,000

Cost of goods $3,000,000

sold

Other operating $500,000

expenses

Interest expense $100,000

Tax expense $120,000

Denali’s gross profit is equal to:

A. $280,000.
B. $500,000.
C. $1,000,000.
4. Under IFRS, income includes increases in economic benefits
from:
A. increases in liabilities not related to owners’
contributions.
B. enhancements of assets not related to owners’
contributions.
C. increases in owners’ equity related to owners’
contributions.
5. Fairplay had the following information related to the sale of
its products during 2009, which was its first year of business:
Revenue $1,000,000

Returns of goods $100,000

sold

Cash collected $800,000

Cost of goods sold $700,000

Under the accrual basis of accounting, how much net revenue

would be reported on Fairplay’s 2009 income
statement?
A. $200,000.
B. $900,000.
C. $1,000,000.
6. Apex Consignment sells items over the internet for
individuals on a consignment basis. Apex receives the items
from the owner, lists them for sale on the internet, and
receives a 25 percent commission for any items sold. Apex
collects the full amount from the buyer and pays the net
amount after commission to the owner. Unsold items are
returned to the owner after 90 days. During 2009, Apex had
the following information:
▪ Total sales price of items sold during 2009 on consignment was
€2,000,000.
▪ Total commissions retained by Apex during 2009 for these items
was €500,000.
How much revenue should Apex report on its 2009 income
statement?
A. €500,000.
B. €2,000,000.
C. €1,500,000.
7. A company previously expensed the incremental costs of
obtaining a contract. All else being equal, adopting the May
2014 IASB and FASB converged accounting standards on
 revenue recognition makes the company’s profitability
initially appear:
A. lower.
B. unchanged.
C. higher.
8. During 2009, Accent Toys Plc., which began business in
October of that year, purchased 10,000 units of a toy at a cost
of ₤10 per unit in October. The toy sold well in October. In
anticipation of heavy December sales, Accent purchased 5,000
additional units in November at a cost of ₤11 per unit. During
2009, Accent sold 12,000 units at a price of ₤15 per unit. Under
the first in, first out (FIFO) method, what is Accent’s cost of
goods sold for 2009?
A. ₤120,000.
B. ₤122,000.
C. ₤124,000.
9. Using the same information as in Question 8, what would
Accent’s cost of goods sold be under the weighted average
cost method?
A. ₤120,000.
B. ₤122,000.
C. ₤124,000.
10. Which inventory method is least likely to be used under
IFRS?
A. First in, first out (FIFO).
B. Last in, first out (LIFO).
C. Weighted average.
11. At the beginning of 2009, Glass Manufacturing purchased a
new machine for its assembly line at a cost of $600,000. The
machine has an estimated useful life of 10 years and
estimated residual value of $50,000. Under the straight-line
method, how much depreciation would Glass take in 2010 for
financial reporting purposes?
A. $55,000.
B. $60,000.
 C. $65,000.
12. Using the same information as in Question 16, how much
depreciation would Glass take in 2009 for financial reporting
purposes under the double-declining balance method?
A. $60,000.
B. $110,000.
C. $120,000.
13. Which combination of depreciation methods and useful lives
is most conservative in the year a depreciable asset is
acquired?
A. Straight-line depreciation with a short useful life.
B. Declining balance depreciation with a long useful life.
C. Declining balance depreciation with a short useful life.
14. Under IFRS, a loss from the destruction of property in a fire
would most likely be classified as:
A. continuing operations.
B. discontinued operations.
C. other comprehensive income.
15. A company chooses to change an accounting policy. This
change requires that, if practical, the company restate its
financial statements for:
A. all prior periods.
B. current and future periods.
C. prior periods shown in a report.
16. For 2009, Flamingo Products had net income of $1,000,000.
At 1 January 2009, there were 1,000,000 shares outstanding.
On 1 July 2009, the company issued 100,000 new shares for
$20 per share. The company paid $200,000 in dividends to
common shareholders. What is Flamingo’s basic earnings per
share for 2009?
A. $0.80.
B. $0.91.
C. $0.95.
 17. For its fiscal year-end, Calvan Water Corporation (CWC)
reported net income of $12 million and a weighted average of
2,000,000 common shares outstanding. The company paid
$800,000 in preferred dividends and had 100,000 options
outstanding with an average exercise price of $20. CWC’s
market price over the year averaged $25 per share. CWC’s
diluted EPS is closest to:
A. $5.33.
B. $5.54.
C. $5.94.
18. A company with no debt or convertible securities issued
publicly traded common stock three times during the current
fiscal year. Under both IFRS and US GAAP, the company’s:
A. basic EPS equals its diluted EPS.
B. capital structure is considered complex at year-end.
C. basic EPS is calculated by using a simple average
number of shares outstanding.
19. Laurelli Builders (LB) reported the following financial data
for year-end December 31:
Common shares outstanding, January 1 2,020,000

Common shares issued as stock dividend, June 1 380,000

Warrants outstanding, January 1 500,000

Net income $3,350,000

Preferred stock dividends paid $430,000

Common stock dividends paid $240,000

Which statement about the calculation of LB’s EPS is most

accurate?
A. LB’s basic EPS is $1.12.
B. LB’s diluted EPS is equal to or less than its basic EPS.
C. The weighted average number of shares outstanding is
2,210,000.
20. Cell Services Inc. (CSI) had 1,000,000 average shares
outstanding during all of 2009. During 2009, CSI also had
10,000 options outstanding with exercise prices of $10 each.
The average stock price of CSI during 2009 was $15. For
 purposes of computing diluted earnings per share, how many
shares would be used in the denominator?
A. 1,003,333.
B. 1,006,667.
C. 1,010,000.
21. For its fiscal year-end, Sublyme Corporation reported net
income of $200 million and a weighted average of
50,000,000 common shares outstanding. There are
2,000,000 convertible preferred shares outstanding that paid
an annual dividend of $5. Each preferred share is
convertible into two shares of the common stock. The
diluted EPS is closest to:
A. $3.52.
B. $3.65.
C. $3.70.
22. When calculating diluted EPS, which of the following
securities in the capital structure increases the weighted
average number of common shares outstanding without
affecting net income available to common shareholders?
A. Stock options.
B. Convertible debt that is dilutive.
C. Convertible preferred stock that is dilutive.
23. Which statement is most accurate? A common-size income
statement:
A. restates each line item of the income statement as a
percentage of net income.
B. allows an analyst to conduct cross-sectional analysis
by removing the effect of company size.
C. standardizes each line item of the income statement
but fails to help an analyst identify differences in
companies’ strategies.
 24. Selected year-end financial statement data for Workhard are
shown below.
$ MILLIONS

Beginning shareholders’ equity 475

Ending shareholders’ equity 493

Unrealized gain on available-for-sale securities 5

Unrealized loss on derivatives accounted for as hedges ─3

Foreign currency translation gain on consolidation 2

Dividends paid 1

Net income 15

Workhard’s comprehensive income for the year:

A. is $18 million.
B. is increased by the derivatives accounted for as hedges.
C. includes $4 million in other comprehensive income.
25. When preparing an income statement, which of the following
items would most likely be classified as other comprehensive
income?
A. A foreign currency translation adjustment.
B. An unrealized gain on a security held for trading
purposes.
C. A realized gain on a derivative contract not accounted
for as a hedge.