Question 1
If a firm consolidates subsidiaries that are not wholly owned, an income statement item is created that is termed ________.

equity income

extraordinary gain or loss

gain or loss from sale of subsidiary

minority or noncontroling share of earnings
 
Question 2
If Investor Company owns 20% of the stock of Investee Company and Investee Company reports profits of $100,000, then Investor Company would report equity income of ________.

$20,000

$0

$80,000

None of these answers are correct
 
Question 3
If sales increase or decrease it is important to determine whether the change is a result of changes in price, in volume, or a combination of both.
True
False
 
Question 4
If discretionary expenses are reduced primarily to benefit the current year's reported earnings, the long-run impact on the firm's operating profit may be detrimental and the earnings quality is lowered.
True
False
 
Question 5
How can the amount of depreciation expense impact the quality of a company's reported earnings?

Firms may choose from a variety of methods to record depreciation.

Any and all of these activities can impact the quality of earnings.

Firms can choose how long they expect an asset to last.

Firms may record operating expenses as capital expenditures.
 
Question 6
How is a firm's average or effective income tax rate calculated?

Income tax expense divided by operating profit.

Income tax expense divided by earnings before income taxes.

Income tax expense divided by sales.

Income tax expense divided by net income.
 
Question 7
Caterpillar Inc. reported the following (in millions):
2017 2016
Sales $39,867 $29,540
Cost of goods sold 30,367 23,886
2.
As a percentage of sales, how much did Caterpillar's gross profit increase or decrease during 2017?

Gross profit increased from 76% to 81%.

Gross profit increased from 19% to 24%.

Gross profit decreased from 24% to 19%.

Gross profit decreased from 81% to 76%.
 
Question 8
Generally accepted accounting principles and tax law under the Internal Revenue Code require that the same depreciation method be used for both the financial statements and the federal tax return.
True
False
 
Question 9
Each individual user of financial statements should adjust the reported earnings figure to reflect what that particular user believes is relevant to the decision at hand.
True
False
 
Question 10
Which of the following items on the income statement is disclosed on an after-tax basis?

Each of these items is disclosed on an after-tax basis.

Amortization of goodwill

Unusual or infrequent gains and losses

Discontinued operations
 
Question 11
How do diluted earnings per share differ from basic earnings per share?

Diluted earnings per share considers the effect on earnings per share if convertible securities were converted into common stock.

Diluted earnings per share is always larger than basic earnings per share.

Diluted earnings per share uses operating profit in the numerator while basic earnings per share uses net profit.

Diluted earnings per share uses actual common stock outstanding at the end of year while basic earnings per share uses the average number of shares outstanding throughout the year.
 
Question 12
Which of the following best describes the relationship between the cost of goods sold and gross profit?

Only service companies report both cost of goods sold and gross profit.

Cost of goods sold plus gross profit equals sales.

Cost of goods sold minus gross profit equals operating profit.

Cost of goods sold equals gross profit.
 
Question 13
The ________ should be assessed when analyzing the quality of the reported amount of cost of goods sold.

amount of discretionary expenses included in the cost of goods sold amount

method used to depreciate the inventory

impairment caused by goodwill

cost flow assumption for inventory
 
Question 14
What is the required reporting for discontinued operations?

The operating results of discontinued operations should be reported as part of continuing operations and any gain or loss on disposal should be disclosed separately from continuing operations.

The operating results of discontinued operations should be reported separately from continuing operations and any gain or loss on disposal should be also be disclosed separately from continuing operations.

The results of discontinued operations should be reported as an extraordinary item.

The gain or loss on the disposal should be reported in comprehensive income.
 
Question 15
The terms net income, net earnings, and net profit tend to be used interchangeably.
True
False
 
Question 16
Snap-On Tools reported a statutory tax rate of 37.4%, an effective tax rate of 32.9%, and a tax rate on net operating profit of 33.3%. Earnings before income tax was $357.8 million. What did Snap-On report as tax expense (on its income statement) for the year?

$119.1 million

None of the choices are correct.

$125.2 million

$117.7 million
 
Question 17
The reduction of ________ would most likely impair the ongoing success of a pharmaceutical firm.

advertising

income tax expense

research and development

cost of goods sold
 
Question 18
The common size income statement expresses each income statement item as a percentage of total assets.
True
False
 
Question 19
Which of the following is not an item listed as other comprehensive income?

Post retirement commitments on health plans

Foreign currency translation adjustments

Adjustments to minimum pension liabilities

Unrealized holding gains and losses on available-for-sale marketable securities
 
Question 20
Operating profit measures the overall performance of the company's operations separately from items that are not directly related to operations.
True
False
 
Question 21
In assessing financial statements, the analyst should consider both qualitative and quantitative components of earnings for an accounting period.
True
False
 
Question 22
When evaluating operating expenses good judgment must be used to decide if increases or decreases in expenses are warranted.
True
False
 
Question 23
Firms report a statement of comprehensive income because ________.

the income statement is only a summary statement and thus a comprehensive statement must also be presented

income statements do not report assets and liabilities

the accrual basis of accounting fails to report the cash consequences of business transactions

a limited number of economic events that alter shareholders' equity are not reported in the income statement
 
Question 24
Which items below would be classified as operating expenses?

Depreciation, capital leases, operating profit

Interest expense, interest income, rent expense

Accounts payable, lease payments, depreciation

Advertising, selling and administrative, repairs and maintenance
 
Question 25
What is the common denominator for each item on the income statement when preparing a common-sized income statement?

Net income

Net sales

Total assets

Operating profit