Reading 32: Understanding the Income Statement LOS F习题精选 including, standards, accounting, 2010

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LOS f: Discuss the financial reporting treatment and analysis of nonrecurring items (including discontinued operations, extraordinary items, and unusual or infrequent items) and changes in accounting standards.

Changes in asset lives and salvage value are changes in accounting:

A) principle and specific disclosures are required.

B) estimates and specific disclosures are required.

C) estimates and no specific disclosures are required.

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Changes in asset lives and salvage value are changes in accounting estimates and are not considered changes in accounting principle. No specific disclosures are required.

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Retrospective presentation is least likely required for a change:

A) from percentage-of-completion to completed contract revenue recognition.

B) from zero salvage value to positive salvage value.

C) from LIFO to average cost inventory valuation.

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Changes in accounting principle require retrospective presentation. A change in the salvage value of an asset is a change in accounting estimate, which does not apply retrospectively.

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All the following items are reported net of taxes below net income from continuing operations on the income statement EXCEPT:

A) unusual or infrequent items.

B) extraordinary items.

C) expropriations by foreign governments.

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Unusual or infrequent items appear as a component of net income from continuing operations and are reported "above the line." Extraordinary items, such as expropriations, are unusual and infrequent and appear "below the line."

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Which of the following is least likely reported net of tax on the income statement under U.S. GAAP?

A) Income from discontinued operations.

B) Interest expense.

C) Extraordinary items.

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Interest expense would be considered an expense that is incurred from continuing operations and, therefore, is listed prior to subtracting the income tax expense on the income statement. Income from discontinued operations and extraordinary items are included on the income statement after the net income from continuing operations is reported and after the income tax expense from continuing operations is reported. Therefore, these latter accounts are reported net of tax.

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

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

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

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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.

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Which of the following items regarding the corporate income statement is most accurate?

A) Examples of extraordinary items include expropriations of property and equipment by foreign governments, losses from earthquakes and tornados, and gains from the sale of investments in subsidiaries.

B) Unusual or infrequent items appear in the income statement of a corporation as a component of net income from continuing operations.

C) If a corporation disposes of a business segment that is separable from the company's core business activities, the results of the discontinued segment are reported as a separate line item below income from continuing operations on a pre-tax basis.

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Explanations for incorrect answers are as follows:

• The gain on the sale of a subsidiary is an unusual or infrequent item.
• The results of a discontinued segment are reported below the line, net of tax (after tax).

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To be classified as an extraordinary item on the income statement under U.S. GAAP, the item must be:

A) probable and infrequent in nature.

B) estimated and probable.

C) unusual in nature and infrequent in occurrence.

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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.

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Extraordinary items are:

A) unusual in nature and infrequent.

B) unusual in nature or infrequent.

C) related to the normal course of business.

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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.

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Which of the following statements regarding making changes in accounting principles is least accurate?

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) The general rule is retrospective application.

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

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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. Both remaining statements are accurate.

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Extraordinary items are:

A) unusual or infrequent.

B) unusual and infrequent.

C) reported above the line.

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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.