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

Q6. 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)   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.

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

Q7. For a material item to be classified as an extraordinary item on the income statement, it must be:

A)   unusual in nature and infrequent in occurrence.

B)   probable and infrequent in nature.

C)   estimated and probable.

Q8. Extraordinary items are:

A)   unusual in nature and infrequent.

B)   unusual in nature or infrequent.

C)   related to the normal course of business.

Q9. 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)     Changes in accounting estimates are now treated the same as changes in accounting principles.

C)     The general rule is retrospective application.

Q10. Extraordinary items are:

A)     unusual or infrequent.

B)     reported above the line.

C)     unusual and infrequent.

答案和详解如下:

Q6. 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)   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.

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

Correct answer is C)

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).

Q7. For a material item to be classified as an extraordinary item on the income statement, it must be:

A)   unusual in nature and infrequent in occurrence.

B)   probable and infrequent in nature.

C)   estimated and probable.

Correct answer is A)

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.

Q8. Extraordinary items are:

A)   unusual in nature and infrequent.

B)   unusual in nature or infrequent.

C)   related to the normal course of business.

Correct answer is A)

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.

Q9. 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)     Changes in accounting estimates are now treated the same as changes in accounting principles.

C)     The general rule is retrospective application.

Correct answer is 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. Both remaining statements are accurate.

Q10. Extraordinary items are:

A)     unusual or infrequent.

B)     reported above the line.

C)     unusual and infrequent.

Correct answer is C)

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.

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