Question 1

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

Accepted Answer

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

Question 2

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

Accepted Answer

$$ Gross\ Profit = Net\ Sales - COGS = 50,000 - 30,000 = 20,000 $$

Question 3

According to ASC 606, which step comes immediately after identifying the contract with the customer in the revenue recognition process?

Accepted Answer

Identify the distinct performance obligations.

Question 4

Which of the following is NOT included in comprehensive income?

Accepted Answer

Dividends paid to shareholders.

Question 5

A company has net income of $120,000, weighted average shares outstanding of 40,000, and 5,000 shares from convertible securities and options. What is the diluted EPS?

Accepted Answer

$$ Diluted\ EPS = \frac{Net\ Income}{Weighted\ Average\ Shares\ Outstanding + Convertible\ Shares} = \frac{120,000}{40,000 + 5,000} = \frac{120,000}{45,000} = 2.67 $$

Question 6

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

Accepted Answer

Interest expense

Question 7

If a company reports consistent negative operating cash flows, what does this most likely indicate?

Accepted Answer

The company may be experiencing financial stress.

Question 8

Which method for calculating cash flow from operations adjusts net income for changes in current assets and liabilities?

Accepted Answer

Indirect method

Question 9

A company receives $$10,000 from customers, pays 4$$,000 for inventory, $$2,000 for interest, and 1$$,000 for taxes. What is the net cash flow from operating activities?

Accepted Answer

$$ Net\ Cash\ Flow = Inflows - Outflows = 10,000 - (4,000 + 2,000 + 1,000) = 10,000 - 7,000 = 3,000 $$

Question 10

Which of the following best describes earnings quality?

Accepted Answer

It refers to the sustainability and reliability of reported income.

Question 11

Which section of the statement of cash flows would the purchase of equipment be reported in?

Accepted Answer

Investing activities

Question 12

A company issues new stock and pays dividends in the same year. How are these transactions reflected in the statement of stockholders' equity?

Accepted Answer

Issuing stock increases equity; paying dividends decreases equity.

Question 13

Which of the following is a component of comprehensive income but NOT net income?

Accepted Answer

Unrealized gains on available-for-sale securities

Question 14

A company has net sales of $$200,000 and cost of goods sold of 120$$,000. What is the gross margin percentage?

Accepted Answer

$$ Gross\ Margin\ \% = \frac{Net\ Sales - COGS}{Net\ Sales} 	imes 100 = \frac{200,000 - 120,000}{200,000} 	imes 100 = \frac{80,000}{200,000} 	imes 100 = 40\% $$

Question 15

Which of the following is most likely to be classified as a financing activity on the statement of cash flows?

Accepted Answer

Issuing or repurchasing common stock

Question 16

A company reports net income of $$50,000, depreciation expense of 5$$,000, and an increase in accounts receivable of $2,000. Using the indirect method, what is the cash flow from operating activities?

Accepted Answer

$$ Cash\ Flow = Net\ Income + Depreciation\ Expense - Increase\ in\ Accounts\ Receivable = 50,000 + 5,000 - 2,000 = 53,000 $$

Question 17

Which of the following is a qualitative consideration in preparing financial statements?

Accepted Answer

Management choices affect classification of transactions.

Question 18

A company has the following cash flows: $$15,000 from customers, 3$$,000 paid for inventory, $$2,000 paid for equipment, and 1$$,000 paid in dividends. What is the net cash flow from investing activities?

Accepted Answer

$$ Net\ Cash\ Flow\ (Investing) = -2,000 $$

Question 19

Which of the following statements about the statement of cash flows is TRUE?

Accepted Answer

It complements the income statement and balance sheet by showing how income is converted into cash.

Income Statement, Comprehensive Income, Statement of Stockholders’ Equity, and Statement of Cash Flows – Study Notes (Chapters 3 & 4)

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