Question 1

Which of the following best describes the purpose of the income statement in financial accounting?

Accepted Answer

To report revenues and expenses incurred during a specific accounting period.

Question 2

Under the accrual accounting method, when is revenue recognized according to ASC 606?

Accepted Answer

When the performance obligation is satisfied.

Question 3

A company sells goods for $$50,000 with a cost of goods sold (COGS) of 30$$,000. What is the gross profit?

Accepted Answer

$20,000

Question 4

Which formula correctly calculates Earnings Per Share (EPS)?

Accepted Answer

$$ EPS = \frac{Net\ Income}{Weighted\ Average\ Shares\ Outstanding} $$

Question 5

Which of the following is NOT included in comprehensive income?

Accepted Answer

Dividends paid to shareholders.

Question 6

A company reports net income of $$100,000, pays dividends of 20$$,000, and issues new stock worth $$50,000. What is the ending balance in stockholders' equity if the beginning balance was 500$$,000?

Accepted Answer

$580,000

Question 7

Which activity is classified as an investing activity on the statement of cash flows?

Accepted Answer

Purchase of equipment.

Question 8

If a company has positive operating cash flows but negative investing cash flows, what does this typically indicate?

Accepted Answer

The company is generating cash from operations and investing in growth.

Question 9

Which of the following is a non-operating item on the income statement?

Accepted Answer

Interest expense.

Question 10

A company uses the indirect method to calculate cash flow from operations. Which adjustment is necessary if accounts receivable increase during the period?

Accepted Answer

Subtract the increase from net income.

Question 11

Which of the following best describes earnings quality?

Accepted Answer

The sustainability and reliability of reported income.

Question 12

Which of the following is a qualitative consideration in financial reporting?

Accepted Answer

Management choices affecting classification of transactions.

Question 13

A company has net income of $$80,000, depreciation expense of 10$$,000, and an increase in accounts payable of $5,000. What is the cash flow from operations using the indirect method?

Accepted Answer

$95,000

Question 14

Which of the following is true about the direct and indirect methods for calculating cash flow from operations?

Accepted Answer

Both methods produce the same operating cash flow total.

Question 15

Which of the following is a component of comprehensive income?

Accepted Answer

Accumulated other comprehensive income (AOCI).

Question 16

A company issues convertible securities and options. How does this affect the calculation of diluted EPS?

Accepted Answer

Diluted EPS includes the effect of convertible securities and options.

Question 17

Which of the following is NOT a financing activity on the statement of cash flows?

Accepted Answer

Purchase of property, plant, and equipment.

Question 18

If a company has consistent negative operating cash flows, what might this indicate?

Accepted Answer

Potential financial stress or unsustainable operations.

Question 19

Which of the following best describes the relationship between net income and operating cash flow?

Accepted Answer

Comparing net income to operating cash flow helps assess earnings quality.

Question 20

A company has the following data: Net income = $120,000; Weighted average shares outstanding = 40,000. What is the basic EPS?

Accepted Answer

$$ EPS = \frac{120,000}{40,000} = 3.00 $$

Exam 2 Study Guide: Income Statement, Comprehensive Income, Statement of Stockholders’ Equity, and Statement of Cash Flows

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