Alexandria Company

Income statement
For the period ended in 31-12-2020
Net sales Xx
Cost of goods sold (xx)
Gross profit Xx
Operating expenses:
Selling expenses Xx
Administrative expenses Xx
Xx
Income from operations Xx
Other revenues and expenses:
Interest expenses (Xx)
Rent revenues Xx
Income before tax Xx
Tax expense (xx)

Income from continuing operations Xx

Gain (loss) from discontinued operations (after tax) Xx
Gain (loss) from extraordinary items (after tax)
(xx)
Net income
xx

Some equations

Net sales = Sales – Sales returns and allowances – sales

discount

Cost of goods sold = Goods available for sale (Beginning

inventory + net purchases) – Ending inventory

Net purchases = purchases – purchase discount - purchases

returns and allowances
In manufacturing organizations:

Raw materials used in production Xx

Direct labor Xx
Factory Overhead Xx
Manufacturing cost Xx
+ Beginning work in process Xx
- Ending work in process (xx)

Cost of goods manufactured xx

In the income statement:

Cost of goods sold = Beginning inventory (FG) + cost of goods

manufactured – ending inventory (FG)

Questions on Ch. 4

MULTIPLE CHOICES

1. Gross profit is the difference between:

a. net income and operating income

b. revenues and expenses

c. sales and cost of goods sold

d. income from continuing operations and discontinued operations

e. gross sales and sales discounts

2. Which of the following would be included in operating income?

a. interest income for a manufacturing firm

b. rent income for a leasing subsidiary

c. gain from sale of marketable securities for a retailer

d. dividend income for a service firm

e. none of the answers are correct

3. The following relate to Data Original in 2008. What is the ending

inventory?

Purchases $540,000

Beginning Inventory 80,000

Purchase Returns 10,000

Sales 800,000

Cost of Goods Sold 490,000

a. $120,000

b. $140,000

c. $210,000

d. $260,000
 e. none of the answers are correct

4. Changes in account balances of Multi-Plus Inc. during 2008 were:

Increase

Assets $420,000

Liabilities 125,000

Capital Stock 100,000

Additional Paid-In Capital 140,000

Retained Earnings ?

Assuming that there were no charges to retained earnings other

than dividends of $62,000, the net income for 2008 was:

a. ($7,000)

b. $55,000

c. $117,000

d. $257,000

e. none of the answers are correct

5. When a company discontinues and disposes of a component

segment of its operations, the gain or loss from disposal should
be reported as:

a. an adjustment to retained earnings

b. a sale of fixed assets in "other" expense

 c. an extraordinary item

d. an accounting change

e. a special item after continuing operations and before extraordinary

items

6. If the disposal of a segment meets the criteria of a disposal of a

segment, then:

a. the loss on disposal is an extraordinary item

b. the loss on disposal is categorized as "other expense"

c. the results of operations of the segment will be reported in

conjunction with the gain or loss on disposal

d. the disposal qualifies as a change in entity, and prior years'

statements presented on comparative purposes must be restated

e. the effects of the disposal are shown as part of operations

7. Which of the following would be classified as an extraordinary

item on the income statement?

a. loss from a strike

b. correction of an error related to a prior period

c. write-off of obsolete inventory

d. loss on disposal of a segment of business

e. loss from prohibition of a product

8. If a firm consolidates subsidiaries that are not wholly owned, an

income statement item is created that is termed:
 a. dividend income

b. minority share of earnings

c. equity income

d. extraordinary

e. gain from sale of subsidiary

9. Which of the following will not affect retained earnings?

a. declaration of a stock dividend

b. payment of a cash dividend previously disclosed

c. adjustment for an error of a prior period

d. net income

e. net loss

10. Anchor Company has 1,000,000 shares of common stock

with a par value of $5. Additional paid-in capital totals $5,000,000
and retained earnings is $8,000,000. The directors declare a 10%
stock dividend when the market value is $15. The reduction of
retained earnings as a result of the declaration will be:

a. $0

b. $500,000

c. $800,000

d. $1,000,000

e. $1,500,000
11. The stockholders' equity of Anamanda Company at
September 30, 2008, is presented below:

Common Stock, par value $10, authorized 500,000

shares; 200,000 shares

issued and outstanding $2,000,000

Paid-In Capital in Excess of Par 300,000

Retained Earnings 1,300,000

$3,600,000

On October 1, 2008, the Board of Directors of Anamanda declared

a 10% stock dividend to be distributed on November 10. The
market price of the common stock was $15 on October 1 and $17
on November 10. What is the amount of the charge to retained
earnings as a result of the declaration and distribution of this
stock dividend?

a. $0

b. $200,000

c. $300,000

d. $340,000

e. $750,000

12. Andromeda Industries had 300,000 shares of common

stock with a $3 par value and retained earnings of $180,000. In
2008, earnings per share were $1.80. In 2009, the stock was split
3 for 1. Which of the following would not result from the stock
split?

a. The new shares would total 900,000.

b. The total amount in the capital stock account would remain the
same.

c. The par value would become $1.

d. Retained earnings would be reduced.

e. The earnings per share for 2006 would be restated at $0.60.

13. Which of the following is not true about a stock dividend?

a. With a stock dividend, the firm issues a percentage of outstanding

stock as new shares to existing shareholders.

b. The overall effect of a stock dividend is to leave total stockholders'

equity and each owner's share of stockholders' equity unchanged.

c. In theory, with a stock dividend, total market value considering all

outstanding shares should not change.

d. Since the number of shares changes under a stock dividend, any

ratio based on the number of shares must be restated.

e. The accounting for a stock dividend, assuming the distribution is

relatively small, requires that the par value of the stock be removed
from retained earnings.

14. Which of the following is not a category within

accumulated other comprehensive income?

a. post retirement commitments on health plans

b. foreign currency translation adjustments

c. unrealized holding gains and losses on available-for-sale marketable
securities

d. changes to stockholders equity resulting from additional minimum

pension liability adjustments

e. unrealized gains and losses from derivative instruments

15. Which of the following is a recurring item?

a. equity in earnings of nonconsolidated subsidiaries

b. error of a prior period

c. discontinued operations

d. extraordinary gain

e. cumulative effect of change in accounting principle

16. If Investor Company owns 20% of the stock of Investee

Company and Investee Company reports profits of $100,000, then
Investor Company reports equity income of:

a. $80,000

b. $20,000

c. $40,000

d. $60,000

e. none of the answers are correct

17. Which of the following items on the income statement is not
disclosed net of tax?

a. unusual or infrequent item disclosed separately

b. discontinued operations

c. extraordinary loss

d. cumulative effect of change in accounting principle

e. unusual or infrequent item disclosed separately and discontinued

operations are both not disclosed net of tax

18. Which of the following will be disclosed in the

reconciliation of retained earnings?

a. adjustment for an error of a prior period

b. net income

c. net loss

d. dividends

e. all of the answers are correct

19. Fisher Company has 1,000,000 share of common stock

with a par value of $10. Additional paid-in capital totals
$10,000,000 and retained earnings is $12,000,000. The directors
declare a 6% stock dividend when the market value is $5. The
reduction of retained earnings as a result of the declaration will
be:

a. $0

b. $300,000

c. $600,000
 d. $500,000

e. none of the answers are correct

20. Which of the following would be classified as an

extraordinary item on the income statement?

a. loss on disposal of a segment of business

b. cumulative effect of a change in accounting principle

c. a sale of land

d. an error correction that relates to a prior year

e. a loss from a flood in a location that would not be expected to flood

problems

1. Information related to Batavia Furniture Company for the year

ended December 31, 2008, follows.

Cost of Goods Sold $ 70,000

Dividends Declared 5,000

Flood Loss (pre-tax) 12,000

General Expense 8,000

Other Income 9,000

Other Expense 11,000

Retained Earnings, January 1, 2006 116,000

Sales 131,000

Selling Expense 7,000

Required:

Prepare in good form a multiple-step income statement for the

year 2008. Assume a 50% tax rate and that 5,000 shares of
common stock were outstanding during the year.

2. The income statement for Lifeline Products in single-step

format follows.

Lifeline Products

Income Statement

For the Year Ended December 31, 2008

Revenues:

Sales $3,000,000

Rent Income 14,000

$3,014,000

Costs and Expenses:

Cost of Sales 2,370,000

Selling and Administrative Expenses 322,000

Interest Expense 48,000

Loss on the Sale of Plant Assets 16,000

 $2,756,000

Income Before Taxes $ 258,000

Income Taxes 112,000

Net Income $ 146,000

Earnings per Share $ 7.30

Required:

a. Convert the statement to multiple-step format.

b. Recompute net income with the unusual loss removed.

c. Why may net income with the unusual loss removed be preferable
to use for trend analysis?

d. Speculate on why this loss is not considered extraordinary or as a

disposal of a segment.
4. Forta Company presents you with the following account balances
taken from the December 31, 2008, trial balance.

Required: Prepare a single-step income statement in proper form.

Sales $200,000

Cost of Goods Sold 80,000

Cash 10,000

Selling Expenses 20,000

General and Administrative Expenses 15,000

Interest Income 3,000

Interest Expense 2,000

Accounts Receivable 15,000

Retained Earnings 60,000

Gain on Sale of Property 2,000

Accounts Payable 15,000

Additional data:

1. 10,000 shares of common stock were outstanding the

entire year.

2. The income tax rate is 35%.

ANS:
 Forta Company

Income Statement

For the Year Ended December 31, 2008

Sales $200,000

Interest Income 3,000

Gain on Sale of Property 2,000

Total Revenue $205,000

Costs and Expenses

Cost of Goods Sold 80,000

Selling Expenses 20,000

General and Administrative Expenses 15,000

Interest Expense 2,000

Total Expense $117,000

Income Before Income Taxes 88,000

Taxes on Income 30,800

Net Income $ 57,200

Net Income per Common Share $5.72

5. Patricia Company owns 25% of Sandra Company and accounts for the
investment on the equity basis and does not consolidate. At the
beginning of 2008, the investment in Sandra Company was $180,000.
In 2008, Sandra Company earned $70,000 and paid dividends of
$10,000.

Required:

a. How much will Patricia Company report as equity in earnings of

Sandra Company in 2008?

b. How much cash flow will Patricia Company receive from Sandra
Company in 2008?

c. Why does recognition of equity earnings cause problems in

analysis?

ANS:

a. $70,000  25% = $17,500

b. $10,000  25% = $2,500

c. Equity earnings cause a problem in analysis because the amount of

earnings are usually different than the cash generated, as was
illustrated in (a) and (b). Equity earnings also relate to profits of
another company.
6. Oregm Imports engages in the retail sale of household
products and clothing. During 2008, the company disposed of the
clothing segment. Oregm Imports had 150,000 shares of stock
outstanding all year. The results of operations for 2008 follow.

Household

Products Clothing

Net sales $15,000,000$3,900,000

Cost of goods sold 11,400,000 3,500,000

Operating expenses 1,400,000 300,000

Loss on disposal of clothing

business

(before income tax effect) 680,000

Interest expense 40,000

Extraordinary loss from

expropriation of

operations in foreign country

(before

income tax effect) 80,000

Income taxes of 40% apply to all items.

Required:

Prepare a multiple-step income statement for the year ended

December 31, 2008, in good format.
ANS:

Oregm Imports

Income Statement

For the Year Ended December 31, 2008

Net sales $15,000,000

Cost of goods sold 11,400,000

Gross profit $
3,600,000

Operating expenses 1,400,000

Operating income $
2,200,000

Interest expense 40,000

Income $
2,160,000

Income tax (40%) 864,000

Income from continuing $

operations 1,296,000

Discontinued operations:

Income during year $100,000

Less: taxes (40,000)$ 60,000

Loss from disposal $680,000

Less: taxes 272,000 (408,000) (348,000)

 Income before $
extraordinary loss 948,000

Extraordinary item:

Loss from expropriation $ 80,000

Less: taxes (32,000) (48,000)

Net income $
900,000
 Per common share:

Income from continuing

operations $8.64

Discontinued operations (2.32)

Income before extraordinary

loss $6.32

Extraordinary item (0.32)

Net income
$6.00

7. Canco Inc. owns 70% of Supersonics and consolidates this

subsidiary. In 2008, Supersonics earned $100,000 after tax and
Canco earned $1,000,000. Without consideration of minority
interests, the stockholders' equity of Supersonics at the end of
2008 was $1,200,000.

Required:

a. Determine the minority share of earnings in 2008.

b. Determine the consolidated net income.

c. Determine the minority interest at the end of 2008 on the

balance sheet.

d. How should minority interest be classified on the balance sheet

for analysis?

ANS:
a. Minority share: 30%  $100,000 =
$30,000

b. Consolidated net income: $1,000,000 Canco

Supersonics
+ 100,000

- Minority
30,000Interest

$1,070,000

c. Minority interest: 30%  $1,200,000 =

$360,000.

d. Minority interest is best classified as

a liability for analysis.

8. Information for Scandinavian Products at the end of Year 4

follows.

Current Assets $900,000

Current Liabilities 400,000

Fixed Assets, Net 600,000

Investments 100,000

Long-Term Debt 500,000

Dividends Declared on Common Stock during the

Year 50,000

Income Summary (income) 225,000

Retained Earnings, January 1, Year 4 ?

Common Stock 150,000

Premium on Common Stock 250,000

Required:

a. Find the ending balance in Retained Earnings as of December

31, Year 4.

b. Find the beginning balance in Retained Earnings as of

January 1, Year 4.

ANS:

a. Ending Balance

Assets Liabilities + Equity

$ 900,000 $ 400,000

600,000 500,000

100,000 150,000

__________ 250,000

$1,600,000 $1,300,000

Retained Earnings, Dec. 31

300,000

$1,600,000

b. Retained Earnings, Dec. 31 = $ 300,000

+ Dividends 50,000
 $ 350,000

- Net Income (income summary) 225,000

Retained Earnings, Jan. 1 $ 125,000

9. Assume that Algary, Inc. uses the following financial

statements for the year ended December 31, 2008.

BS-Balance Sheet IS-Income Statement RE-Retained Earnings

Categories on these statements follow:

A. Current Assets

B. Investments

C. Fixed Assets

D. Intangible Assets

E. Current Liabilities

F. Long-Term Liabilities

G. Stockholders' Equity

H. Sales and Other Operating

Revenue

I. Cost of Goods Sold

J. Operating Expenses
K. Other Income

L. Other Expense

M. Additions to Retained Earnings

N. Deductions from Retained

Earnings
Required: Indicate by the statement abbreviation and category
number how each of the following is best classified or where it is
included in the computation. If an item is not reported anywhere,
use the letter "X" to indicate this. Only the best answer should be
selected.

For balance sheet accounts only, if the account balance is

normally opposite that of a typical account (contra), set off the
answer in parentheses.

Samples. IS H Sales

(BS C) Accumulated
Depreciation

a. Capital Lease Obligations (due 2010 and

beyond)

b. Federal Income Taxes Withheld

c. Accounts Payable

d. Equipment

e. Unearned Management Fee Revenue

f. Unamortized Bond Discount (due 2008)

g. Interest Expense

h. Dividends Declared for the Period

i. Work In Process Inventory

j. Purchase Returns and Allowances

k. Unexpired Office Insurance Expense

l. Rent Income (leasing company)

m. Treasury Stock

n. Office Salaries Expense

o. Loss on Sale of Equipment

p. Bank Overdrafts

q. Unused Sales Supplies

r. Bad Debt Expense

s. Petty Cash

t. Oil Wells (drilling company)

u. Trade Name

v. Stock Dividends Declared

w. Gain from Winning Lawsuit (suit was filed in

2004)
ANS:

a. BS F

b. BS E

c. BS E

d. BS C

e. BS E

f. (BS F)

g. IS L

h. RE N

i. BS A

j. IS I

k. BS A

l. IS H

m. (BS G)

n. IS J

o. IS L

p. BS E

q. BS A

r. IS J

s. BS A

t. BS C

u. BS D
v. RE N

w. IS K

10. The income statement of Jones Company for the year

ended December 31, 2008, shows:

Sales $1,800,000

Cost of good sold 1,200,000

Gross profit $
600,000

Operating expenses (200,000)

Equity earnings of nonconsolidated subsidiaries 30,000

Operating income before income taxes $

430,000

Taxes related to operations (130,000)

Net income from operations before cumulative effect $

of change in accounting principle 300,000

Cumulative effect of change in accounting principle

(less applicable income

taxes of $30,000) 60,000

Net income $ 360,000

Required:

a. Compute the net earnings after removing

 nonrecurring items.

b. Determine the earnings from the nonconsolidated

subsidiary.

c. Determine the total tax amount.

ANS:

a. $360,000

60,000

$300,000

b. $ 30,000

c. $130,000

30,000

$160,000