Reading 32: Understanding the Income Statement - LOS g ～ Q

答案和详解如下：

1.Which of the following statements is regarding the income statement is least accurate?

A)   The results of discontinued operations are reported below income from continuing operations on the income statement net of taxes.

B)   Extraordinary items are both unusual in nature and infrequent in occurrence. Extraordinary items are disclosed net of taxes after income from continuing operations in the income statements.

C)   Changes in accounting principle are applied retrospectively and described in the footnotes.

D)   Items that are unusual in nature or infrequent in occurrence appear below income from continuing operations on a pretax basis.

The correct answer was D)

The key word here is "or." Unusual or infrequent items are unusual or infrequent, but NOT both. These items are reported (as a separate line item) as a component of net income from continuing operations.

Examples of unusual or infrequent items include:

§ Gains or losses from the disposal of a business segment (employee separation costs, plant shutdown costs, etc.)

§ Gains or losses from the sale of assets or investments in subsidiaries

§ Provisions for environmental remediation

§ Impairments, write-offs, write-downs, and restructuring costs

§ Integration expenses associated iwth businesses that have been recently acquired.

2.Extraordinary items are:

A)   reported above the line.

B)   unusual and infrequent.

C)   unusual or infrequent.

D)   reported on the balance sheet.

The correct answer was B)

Extraordinary items are unusual and infrequent, reported below the line separate from income from continuing operations on the income statement, and would include such items as: foreign government confiscation, earthquake damages, losses from volcanic eruptions, etc.

3.Which of the following statements regarding making changes in accounting principles is FALSE?

A)   A change in accounting principle is a change from one generally accepted accounting principle to another generally accepted principle. The firm making the change must justify the change.

B)   Changes in accounting estimates are now treated the same as changes in accounting principles.

C)   The general rule is retrospective application.

D)   The reported prior year statements should be restated to reflect the new accounting principle.

The correct answer was B)    

Changes in accounting estimates are not treated the same as changes in principles. Changes in principles are treated retrospectively, whereas changes in accounting estimates are accounted for in the current and future periods. There is one exception to this; changes in depreciation methods are treated as changes in estimates. The other three statements are true.

4.Extraordinary items are:

A)   related to the normal course of business.

B)   from discontinued operations.

C)   unusual in nature or infrequent.

D)   unusual in nature and infrequent.

The correct answer was D)

Extraordinary items are unusual and infrequent items reported below the line net of taxes. “Below the line” means after net income from continuing operations but before net income.

- Discontinued operations are reported below the line net of taxes. 

- Unusual or infrequent items are unusual or infrequent, but not both. They appear (a separate line item) as a component of net income from continuing operations that must be removed if not deemed to be a component of persistent income. They are reported above the line before taxes. 

- Changes in accounting principle are reported below the line net of taxes. 

- Accounting errors go directly to retained earnings.

5.For a material item to be classified as an extraordinary item on the income statement, it must be:

A)   estimated and probable.

B)   current and unusual in frequency.

C)   unusual in nature and infrequent in occurrence.

D)   probable and infrequent in nature.

The correct answer was C)    

Extraordinary items are unusual and infrequent events that are reported separately, net of tax "below the line." Examples are expropriations by foreign governments and uninsured losses from earthquakes, eruptions, and tornadoes.