The following questions are adapted from a variety of sources including questions developed by the AICPA Board of Examiners and those used in the Kaplan CPA Review Course to study the income statement and statement of cash flows while preparing for the CPA examination. Determine the response that best completes the statements or questions.
1. Roco Company manufactures both industrial and consumer electronics. Due to a change in its strategic focus, the company decided to exit the consumer electronics business, and in 2013 sold the division to Sunny Corporation.
The consumer electronics division qualifies as a component of the entity according to GAAP. How should Roco report the sale in its 2013 income statement?
a. Include in income from continuing operations as a nonoperating gain or loss.
b. As an extraordinary item.
c. As a discontinued operation, reported below income from continuing operations.
d. None of the above.
2. Bridge Company’s results for the year ended December 31, 2013, include the following material items:
Sales revenue $5,000,000
Cost of goods sold 3,000,000
Administrative expenses 1,000,000
Gain on sale of equipment 200,000
Loss on discontinued operations 400,000
Loss from earthquake damage (unusual and infrequent event) 500,000
Understatement of depreciation expense in 2012 caused by mathematical error 250,000
Bridge Company’s income from continuing operations before income taxes for 2013 is:
3. In Baer Food Co.’s 2013 single-step income statement, the section titled “Revenues” consisted of the following:
Net sales revenue $187,000
Income on discontinued operations including gain on
disposal of $21,000 and net taxes of $6,000 12,000
Interest revenue 10,200
Gain on sale of equipment 4,700
Extraordinary gain net of $750 tax effect 1,500
Total revenues $215,400
In the revenues section of the 2013 income statement, Baer Food should have reported total revenues of
4. On November 30, 2013, Pearman Company committed to a plan to sell a division that qualified as a component of the entity according to GAAP, and was properly classified as held for sale on December 31, 2013, the end of the company’s fiscal year. The division was tested for impairment and a $400,000 loss was indicated. The division’s loss from operations for 2013 was $1,000,000. The final sale was expected to occur on February 15, 2014. What before-tax amount(s) should Pearman report as loss on discontinued operations in its 2013 income statement?
a. $1,400,000 loss.
b. $400,000 loss.
d. $400,000 impairment loss included in continuing operations and a $1,000,000 loss from discontinued operations.
5. Which of the following items is not considered an operating cash flow in the statement of cash flows?
a. Dividends paid to stockholders.
b. Cash received from customers.
c. Interest paid to creditors.
d. Cash paid for salaries.
6. Which of the following items is not considered an investing cash flow in the statement of cash flows?
a. Purchase of equipment.
b. Purchase of securities.
c. Issuing common stock for cash.
d. Sale of land.
Beginning in 2011, International Financial Reporting Standards are tested on the CPA exam along with U.S. GAAP. The following questions deal with the application of IFRS.
7. Under both U.S. GAAP and IFRS, which one of the following items is reported separately in the income statement, net of tax?
a. Restructuring costs.
b. Discontinued operations.
c. Extraordinary gains and losses.
d. None of the above.
8. In a statement of cash flows prepared under IFRS, interest paid
a. Must be classified as an operating cash flow.
b. Can be classified as either an operating cash flow or an investing cash flow.
c. Can be classified as either an operating cash flow or a financing cash flow.
d. Can be classified as either an investing cash flow or a financing cash flow.