Q: If a company’s cost of goods sold (COGS) is $60,000 and net sales are $150,000, what is the COGS percentage?

$\frac{60,000}{150,000} \times 100 = 40\%$

Q: If a company’s advertising expense is $6,000 and net sales are $100,000, what percentage of sales is spent on advertising?

$\frac{6,000}{100,000} \times 100 = 6\%$

Q: A company manufactures toys at a cost of $4 each. In Year 1, the selling price is $10; in Year 2, competition forces the price down to $8. What is the gross profit margin in Year 2?

$\frac{8-4}{8} \times 100 = 50\%$

Question 1

Which of the following best describes the purpose of a common-size income statement?

Accepted Answer

To compare firms with different levels of sales or total assets by expressing each income statement item as a percentage of net sales.

Question 2

According to ASC Topic 606, which is the correct order of the five-step framework for revenue recognition?

Accepted Answer

Identify the contract, identify performance obligations, determine the contract price, allocate the price to performance obligations, recognize revenue when obligations are satisfied.

Question 3

A company sells 1,000 units at $15 each. There are $500 in sales returns and $300 in sales allowances. What is the net sales amount?

Accepted Answer

$14,200

Question 4

Which of the following items must be disclosed separately on an income statement, regardless of format?

Accepted Answer

Discontinued operations

Question 5

If a company’s cost of goods sold (COGS) is $60,000 and net sales are $150,000, what is the COGS percentage?

Accepted Answer

$\frac{60,000}{150,000} 	imes 100 = 40\%$

Question 6

Which statement about gross profit margin is correct?

Accepted Answer

Gross profit margin is the ratio of gross profit to net sales, expressed as a percentage.

Question 7

A company’s gross profit margin decreased from 46.4% to 40.6%. Analysis shows the food division’s margin remained stable, but the tobacco division’s margin fell. What does this indicate?

Accepted Answer

The overall decline is due to the tobacco division.

Question 8

Which of the following is NOT typically included in selling and administrative expenses?

Accepted Answer

Cost of goods sold

Question 9

If a company’s advertising expense is $6,000 and net sales are $100,000, what percentage of sales is spent on advertising?

Accepted Answer

$\frac{6,000}{100,000} 	imes 100 = 6\%$

Question 10

Which of the following best explains why repairs and maintenance expenses might decrease from one year to the next?

Accepted Answer

The company delayed repairs to increase short-term operating profit.

Question 11

Which statement about impairment charges is correct?

Accepted Answer

Impairment charges are recognized when asset values decrease below their carrying amount.

Question 12

A company manufactures toys at a cost of $4 each. In Year 1, the selling price is $10; in Year 2, competition forces the price down to $8. What is the gross profit margin in Year 2?

Accepted Answer

$\frac{8-4}{8} 	imes 100 = 50\%$

Question 13

Which of the following is a key difference between the multiple-step and single-step income statement formats?

Accepted Answer

Multiple-step format provides several intermediate profit measures, while single-step format groups all revenue items together.

Question 14

If net sales increase by 40.9% from one year to the next, which factors should be analyzed to determine the cause?

Accepted Answer

Changes in both price and volume (units sold).

Question 15

Which formula correctly calculates gross profit?

Accepted Answer

$	ext{Gross Profit} = 	ext{Net Sales} - 	ext{Cost of Goods Sold}$

Question 16

Which of the following is a qualitative item on the income statement that may impact the firm's economic reality?

Accepted Answer

Unusual or infrequent items

Question 17

A company’s net sales are $200,000, and its cost of goods sold is $120,000. What is the gross profit margin?

Accepted Answer

$\frac{200,000 - 120,000}{200,000} 	imes 100 = 40\%$

Question 18

Which of the following is most likely to cause an increase in gross profit margin for a manufacturing company?

Accepted Answer

Increase in sales price with constant cost of goods sold.

Question 19

Which statement about the statement of stockholders’ equity is correct?

Accepted Answer

It documents changes in balance sheet equity accounts and links the balance sheet and income statement.

Income Statement, Comprehensive Income, and Statement of Stockholders’ Equity: Analysis and Applications

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