Reading 32: Understanding the Income Statement-LOS a 习题精选 2011, formats, center, income, style

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Session 8: Financial Reporting and Analysis: The Income Statement, Balance Sheet, and Cash Flow Statement
Reading 32: Understanding the Income Statement

LOS a: Describe the components of the income statement, and construct an income statement using the alternative presentation formats of that statement.

 

 

Would an increase in the cost of raw materials used in the production of inventory and would an increase in marketing expenses result in lower gross profit?

Increase in raw materials cost

Increase in marketing expense

A) No Yes

B) Yes No

C) Yes Yes

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Gross profit is equal to sales minus cost of goods sold. Cost of goods sold includes the direct costs of producing a product or service such as raw materials, direct labor, and overhead (fixed costs). Thus, an increase in raw materials costs will result in higher cost of goods sold and lower gross profit. Marketing expenses are considered operating expenses (SG&A), not in cost of goods sold.

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Do gains and losses, as well as expenses appear on the income statement?

A) Only expenses appear on the income statement.

B) Only gains and losses appear on the income statement.

C) Both appear on the income statement.

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Gains and losses result from, transactions that are not a part of the firm’s normal business operations. Expenses are amounts that are incurred to generate revenue; thus, expenses result from the firm’s ongoing operations. Both are included on the income statement.

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During 2007, Topeka Corporation entered into the following transactions:

Transaction #1 – Interest on a certificate of deposit owned by Topeka was credited to Topeka’s investment account.

Transaction #2 – Topeka sold 10,000 shares of common stock at $30 that had been repurchased by Topeka last year for $20.

Should Topeka recognize the results of these transactions as income on the income statement for the year ended December 31, 2007?

A) Neither should be recognized.

B) Both should be recognized.

C) Only one should be recognized.

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Interest earned on the CD is recognized as interest income. The gain on the sale of treasury stock is not reported on the income statement but is relected on the statement of changes in stockholders’ equity and on the balance sheet. The sale proceeds simply increase equity and increase cash.