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Exam 4: The Income Statement and Statement of Cash Flows

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Question 41

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The distinction between operating and non-operating income relates to:

A) Continuity of income.
B) Principal activities of the reporting entity.
C) Consistency of income stream.
D) Reliability of measurements.

E) B) and C)
F) A) and C)

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Question 42

Multiple Choice

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The difference between single-step and multiple-step income statements is primarily an issue of:

A) Consistency.
B) Presentation.
C) Measurement.
D) Valuation.

E) A) and C)
F) B) and C)

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Question 43

Multiple Choice

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Shively Mfg. Co. sold for $18,000 equipment that cost $40,000 and had a book value of $30,000. Shively would report:

The accounting records of Rockness Company provided the data below ($ in 000s). Required: Prepare a reconciliation of net income to net cash flows from operating activities. $\begin{array} { l r } \text { Net income } & \$ 25,200 \\\text { Depreciation and amortization expense } & 3,300 \\\text { Decrease in accounts receivable } & 2,000 \\\text { Increase in inventory } & 4,500 \\\text { Increase in prepaid insurance } & 300 \\\text { Increase in salaries payable } & 900 \\\text { Decrease in interest payable } & 400\end{array}$

Gains, but not losses, from discontinued operations must be separately reported in an income statement.

Cendant Corporation's results for the year ended December 31, 2009, include the following material items: Cendant Corporation's income from continuing operations before income taxes for 2009 is:

Lucia Ltd. reported net income of $135,000 for the year ended December 31, 2009. January 1 balances in accounts receivable and accounts payable were $29,000 and $26,000 respectively. Year-end balances in these accounts were $30,000 and $24,000, respectively. Assuming that all relevant information has been presented, Lucia's cash flows from operating activities would be:

Required: Prepare a multiple-step income statement with earnings per share disclosure.

In the operating activities section of the statement of cash flows, we start with net income:

The following information is for Redwood Inc. for the year ended December 31, 2009. Redwood had a cash and cash equivalents balance of $5,200 on January 1, 2009. Required: Prepare a statement of cash flows for the year using the direct method for operating activities. $\begin{array}{l}\text { Cash received from: }\\\begin{array} { l r } \text { Customers } & \$ 1,900 \\\text { Interest on investments } & 200 \\\text { Sale of land } & 100 \\\text { Sale of common stock } & 600 \\\text { Issuance of debt securities } & 2,000 \\& \\\text { Cash paid for: } & \\\text { Interest on debt } & 300 \\\text { Income tax } & 80 \\\text { Debt principal reduction } & 1,500 \\\text { Purchase of equipment } & 4,100 \\\text { Purchase of inventory } & 1,000 \\\text { Dividends on common stock } & 200 \\\text { Operating expenses } & 500\end{array}\end{array}$

What would be Misty's income before extraordinary item(s) ?

Required: Prepare a single-step income statement with basic earnings per share disclosure.

On June 1, 2009, Romano Inc. changed the estimated useful life of its office equipment from 20 to 12 years. This change would be accounted for:

Comprehensive income reports an expanded version of income to include four types of gains and losses not included in traditional income statements.

The internal auditors for Rockford Products discovered early in 2009 these errors and omissions in their review of the 2008 financial records. The 2008 financial statements have already been issued. 1. A material liability for salaries of $13,000 at December 31, 2008, was not recorded. The salaries were charged to salary expense when paid. 2. Equipment costing $5,500 was purchased without first securing a competitive bid, in violation of company policy. 3. Prior year's depreciation expense was materially understated by $13,500 due to a computation error. Required: Prepare any necessary journal entries required as a result of the findings of the internal auditors. Ignore income tax effects.

Briefly describe the difference between U.S. GAAP and International Accounting Standards in the determination of what constitutes a component of the entity requiring separate reporting as a discontinued operation.

In a recent press release, Estee Lauder Co. reported "a fiscal fourth-quarter loss due to a restructuring charge but said it expects to see earnings growth in its fiscal second through fourth quarters." The New York skincare and cosmetics company reported a net loss of $25.4 million, or 13 cents a share, for the quarter ended June 30, compared with net income of $20.4 million, or six cents a share, a year earlier. Excluding the restructuring charge of $76.9 million, or 32 cents a share, the company said profit would have been $51.5 million, or 19 cents a share. Discuss how Estee Lauder's press release relates to its earnings quality.

A change in depreciation method is accounted for by retrospectively revising prior years' financial statements.

On November 1, 2009, Jamison Inc. adopted a plan to discontinue its barge division, which qualifies as a separate component of the business according to SFAS No. 144. The disposal of the division was expected to be concluded by April 30, 2010. On December 31, 2009, the company's year-end, the following information relative to the discontinued division was accumulated: In its income statement for the year ended December 31, 2009, Jamison would report a before-tax loss on discontinued operations of:

The financial statement presentation of a change in reporting entity is most similar to the reporting of a: