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Financial and Managerial Accounting: The Basis for Business Decisions, 12/e

Jan R. Williams, University of Tennessee
Susan F. Haka, Michigan State University
Mark S. Bettner, Bucknell University
Robert F. Meigs

Income and Changes in Retained Earnings

Multiple Choice Quiz

Please answer all questions


1	In January 1998, Upstate Electric and Gas incurred significant costs to repair transmission lines damaged by the most severe ice storm of the 20th century. These costs will be reported on Upstate's 1998 income statement as:
		A)	Operating expenses.
		B)	An extraordinary loss
		C)	An adjustment to the depreciation expense damaged equipment.
		D)	None of the above.


2	A gain or loss that is material and unusual in nature, but fails to meet the criteria for an extraordinary item:
		A)	Is simply combined with other revenue (if a gain) or other categories of expenses (if a loss) in the current-period income statement.
		B)	Is shown net of tax in a separate section of the current-period income statement following extraordinary items.
		C)	Is individually listed among the items of revenue or expense in computing income from continuing operations for the current period.
		D)	Is disclosed only in footnotes to the current-period financial statement.


3	Because of technological advances, DataComp decides in the current year that the original estimates of salvage value of its computer equipment are too high and reduces all salvage values to zero. In the current year, DataComp:
		A)	Must recompute net income for all prior periods using the new estimate of salvage values and show the cumulative effect of this type of change in the income statement.
		B)	Must recompute net income for all prior periods using the new estimate of salvage values and show the cumulative effect as an adjustment to beginning retained earnings in the statement of retained earnings.
		C)	Treats this situation as an extraordinary item in the current year's income statement.
		D)	Does not have to compute the cumulative effect of this change in estimated salvage values.


4	The earnings per share figure based on income before extraordinary items:
		A)	Corresponds to the cash dividends per share declared on common stock by the board of directors for the current year.
		B)	Is the amount used in computing the p/e ratio for a corporation's common stock.
		C)	Applies to all types of stock issued by a corporation-common as well as preferred.
		D)	Is always higher than the earnings per share figure based on net income.


5	Which of the following is not a necessary condition for the payment of cash dividends of $100,000 by Accutron Corporation for 2001?
		A)	Accutron's board of directors must make a formal declaration of dividends.
		B)	Accutron's net income for 2001 to be $100,000 or greater.
		C)	Accutron must have sufficient cash to pay the dividend.
		D)	Accutron's retained earnings must be $100,000 or greater.


6	Aqua Marine, a small corporation without a competent accounting staff, declared and distributed a small stock dividend in December but through an oversight made no accounting entries for this stock dividend. The result of this oversight on the year-end balance sheet would be:
		A)	An understatement of stockholders' equity.
		B)	An overstatement of stockholders' equity.
		C)	An overstatement of assets.
		D)	An overstatement of retained earnings and an understatement of total paid-in-capital.


7	Which of the following statements about the statement of retained earnings is false?
		A)	It covers the same time period as the income statement.
		B)	It need not be prepared if a separate statement of stockholders' equity is prepared.
		C)	It provides a link between the income statement and the balance sheet.
		D)	It shows whether a corporation has sufficient funds to pay a cash dividend.

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