Quiz: STATEMENT OF COMPREHENSIVE INCOME

Accounting 123

I. THEORIES. True or False. Write A if the statement is correct and B if it is wrong, on the answer
sheet provided along with this questionnaire. Erasures or alterations of any kind will not be given
points. 1 point each item.

1. The income statement is useful for helping to assess the risk or uncertainty of achieving future cash
flows. TRUE
2. A strength of the income statement as compared to the balance sheet is that items that cannot be
measured reliably can be reported in the income statement. F
3. The transaction approach of income measurement focuses on the income-related activities that
have occurred during the period. TRUE
4. Companies frequently report income tax expense as the last item before net income on a single-
step income statement. TRUE
5. Both revenues and gains increase both net income and owners’ equity. TRUE
6. Use of a multiple-step income statement will result in the company reporting a higher net income
than if they used a single-step income statement. F
7. Gains or losses from exchange or translation of foreign currencies are reported as extraordinary
items. F
8. Prior period adjustments can either be added or subtracted in the Retained Earnings Statement.
TRUE
9. Comprehensive income includes all changes in equity during a period except those resulting from
distributions to owners. F
10. The accounting profession has adopted a current operating performance approach to income
reporting. F

II. THEORIES. MCQ. Write the letter (in CAPITAL) corresponding to your answer on the sheet provided
along with this questionnaire. Erasures or alterations of any kind will not be given points. 2 points
each

1. The major elements of the income statement are

a. revenue, cost of goods sold, selling expenses, and general expense.
b. operating section, non-operating section, discontinued operations, extraordinary items, and
cumulative effect.
c. revenues, expenses, gains, and losses.
d. all of these.

2. Information in the income statement helps users to

a. evaluate the past performance of the enterprise.
b. provide a basis for predicting future performance.
c. help assess the risk or uncertainty of achieving future cash flows.
d. only two of the choices
d. all of the choices.

3. Limitations of the income statement include all of the following except

a. items that cannot be measured reliably are not reported.
b. only actual amounts are reported in determining net income.
c. income measurement involves judgment.
d. income numbers are affected by the accounting methods employed.

4. Which of the following would represent the least likely use of an income statement prepared for a
business enterprise?
a. Use by customers to determine a company's ability to provide needed goods and services.
b. Use by labor unions to examine earnings closely as a basis for salary discussions.
c. Use by government agencies to formulate tax and economic policy.
d. Use by investors interested in the financial position of the entity.

5. The income statement reveals

a. resources and equities of a firm at a point in time.
b. resources and equities of a firm for a period of time.
c. net earnings (net income) of a firm at a point in time.
d. net earnings (net income) of a firm for a period of time.
6. The income statement information would help in which of the following tasks?
a. Evaluate the liquidity of a company.
b. Evaluate the solvency of a company
c. Estimate future cash flows
d. Estimate future financial flexibility

7. Which of the following is not a generally practiced method of presenting the income statement?
a. Including prior period adjustments in determining net income
b. The single-step income statement
c. The consolidated statement of income
d. Including gains and losses from discontinued operations of a component of a business in
determining net income

8. Which of the following is not a selling expense?

a. Advertising expense
b. Office salaries expense
c. Freight-out
d. Store supplies consumed

9. The accountant for the Lintz Sales Company is preparing the income statement for 2010 and the
balance sheet at December 31, 2010. The January 1, 2010 merchandise inventory balance will appear
a. only as an asset on the balance sheet.
b. only in the cost of goods sold section of the income statement.
c. as a deduction in the cost of goods sold section of the income statement and as a current asset on
the balance sheet.
d. as an addition in the cost of goods sold section of the income statement and as a current asset on
the balance sheet.

10. Which of the following is never classified as an extraordinary item?

a. Losses from a major casualty.
b. Losses from an expropriation of assets.
c. Gain on a sale of the only security investment a company has ever owned.
d. Losses from exchange or translation of foreign currencies.

11. Which of the following items will not appear in the retained earnings statement?
a. Net loss
b. Prior period adjustment
c. Discontinued operations
d. Dividends

12. Which one of the following types of losses is excluded from the determination of net income in
income statements?
a. Material losses resulting from transactions in the company's investments account.
b. Material losses resulting from unusual sales of assets not acquired for resale.
c. Material losses resulting from the write-off of intangibles.
d. Material losses resulting from correction of errors related to prior periods.

13. Watts Corporation made a very large arithmetical error in the preparation of its year-end financial
statements by improper placement of a decimal point in the calculation of depreciation. The error
caused the net income to be reported at almost double the proper amount. Correction of the error when
discovered in the next year should be treated as
a. an increase in depreciation expense for the year in which the error is discovered.
b. a component of income for the year in which the error is discovered, but separately listed on the
income statement and fully explained in a note to the financial statements.
c. an extraordinary item for the year in which the error was made.
d. a prior period adjustment.

14. Comprehensive income includes all of the following except

a. dividend revenue.
b. losses on disposal of assets.
c. investments by owners.
d. unrealized holding gains.
15. When an entity classifies expenses by logistics, quality control, manufacturing, plant engineering,
sales and marketing, research and development, finance and administration, the classification basis
is by
a. Object of expenditure
b. Services received
c. Area of responsibility
d. Function performed

16. How should exchange gains or losses resulting from foreign currency transactions be accounted
for?
a. Included as component of income from continuing operations for the period in which the rate
changes
b. Included as component of other comprehensive income for the period in which the rate changes
c. Included in the statement of financial position as deferred item
d. Included in net earnings for gains, but deferred for losses

17. A transaction that is material in amount, unusual in nature and infrequent in occurrence, shall be
presented separately as
a. Component of income from continuing operations, but not net of applicable income tax
b. Component of income from continuing operations, net of applicable income tax
c. Component of income from discontinued operation, net of applicable income tax
d. Prior period error, net of applicable income tax

18. Which capital maintenance concept is applied respectively to currently reported net income and
comprehensive income?
a. Financial capital and financial capital
b. Physical capital and physical capital
c. Financial capital and physical capital
d. Physical capital and financial capital

19. The transaction approach in determining income is a concept in which

a. Income is measured as the amount that an entity could consume during a period and be as well off
at the end of that period as it was at the beginning
b. Market values adjusted for the effects of inflation or deflation are used to calculate income
c. The financial statement effects of business events are classified as revenue, gains, expenses and
losses, which are used to measure and define income
d. Income equals the change in market value of the entity’s outstanding share capital for the period

20. At the beginning of the current year, an entity installed cabinets to display its merchandise in
customer’s stores. The entity expects to use these cabinets for 5 years. The income statement for
the current year should include
a. One-fifth of the cabinet costs in cost of goods sold
b. One-fifth of the cabinet costs in selling, general and administrative expenses
c. All of the cabinet costs in cost of goods sold
d. All of the cabinet costs in selling, general and administrative expenses

III. PROBLEMS. Determine the amounts asked by each problem. Final answers should be written on
the sheet provided along with this questionnaire. Erasures or alterations of any kind will not be
given points. 3 points each

PROBLEM 1: Moorman Corporation reports the following information:

Correction of understatement of depreciation expense

in prior years, net of tax P 430,000
Dividends declared 320,000
Net income 1,000,000
Retained earnings, 1/1/10, as reported 2,000,000

1. Moorman should report retained earnings, 1/1/10, as adjusted at: 1,570,000

PROBLEM 2: Moorman Corporation reports the following information:

Correction of understatement of depreciation expense

in prior years, net of tax P 430,000
Dividends declared 320,000
Net income 1,000,000
Retained earnings, 1/1/10, as adjusted 2,000,000

2. Moorman should report retained earnings, 12/31/10, as adjusted at : 2,680,000

PROBLEM 3: The following information was extracted from the accounts of Essex Corporation at
December 31, 2010:
CR(DR)
Total reported income since incorporation P1,700,000
Total cash dividends paid (800,000)
Unrealized holding loss (120,000)
Total stock dividends distributed (200,000)
Prior period adjustment, recorded January 1, 2010 75,000

3. What should be the balance of retained earnings at December 31, 2010? 775,000

PROBLEM 4: Perry Corp. reports operating expenses in two categories: (1) selling and (2) general and
administrative. The adjusted trial balance at December 31, 2010, included the following expense
accounts:
Accounting and legal fees P140,000
Advertising 120,000
Freight-out 75,000
Interest 60,000
Loss on sale of long-term investments 30,000
Officers' salaries 180,000
Rent for office space 180,000
Sales salaries and commissions 110,000

One-half of the rented premises is occupied by the office department.

4. How much of the expenses listed above should be included in Perry's general and administrative
expenses for 2010?

PROBLEM 5: Presented below is certain information pertaining to Edson Company.

Assets, January 1 P240,000

Assets, December 31 230,000
Liabilities, January 1 150,000
Common stock, December 31 80,000
Retained earnings, December 31 31,000
Common stock sold during the year 10,000
Dividends declared during the year 13,000

5. Compute the net income for the year. 24,000

PROBLEM 5: The following is MACEDONIA COMPANY’s pre-audit income statement for the year
ended December 31,2010:

Sales P 2,964,000
Cost of goods sold 1,926,000
Gross income P 1,038,000
Operating expenses:
Rent expenses P 250,000
Salaries expenses 345,000
Utilities expenses 219,000
Advertising expenses 30,000
Warranty expenses 14,000
Other expenses 35,500 893,500
Net income P 144,500

You obtained the following information from the company’s accounting records:
1. Some of Macedonia’s customers pay for their orders in advance. At December 31, 2010, orders
paid for in advance of shipment totaled P15,000. These have been included in the sales figure.
 2. Macedonia’s products are sold with a 30-day money-back guarantee. Customers seldom
returned the products during the year. Macedonia has not included in the sales figure and in
cost of goods sold those products sold within the last 30 days of the current year. The revenue
is P98,000 and the cost of the products is P63,700.
3. On July 1, 2010, Macedonia prepaid its office space rent for 18 months. The amount paid,
P216,000, was recorded as rent expense.
4. The amount of P120,000 was paid on July 1,2010, for general advertising to be completed prior
to December 31,2010. Macedonia’s management believes that the advertising will benefit a 2-
year period and, therefore, has decided to charge the costs to the income statement at the rate
of P5,000 per month.
5. In prior years, Macedonia has estimated warranty expense using a percentage of sales. Future
warranty costs relating to 2010 sales are estimated to amount to 2% of sales. However, during
2010, Macedonia elected to charge costs to warranty expense as a costs were incurred.
Macedonia spent P14,000 during 2010 to repair and replace defective products sold in current
and prior years.

Based on the above data, compute the following

6. The correct amount of Macedonia’s sales revenue for 2010 is: 3,047,000
7. Macedonia’s income statement for 2010 should show gross income: 1,057,300
8. Macedonia’s total expenses (excluding cost of goods sold) for 2010: 886,440
9. Macedonia’s net income for 2010 (ignore income tax) should be: 170,860
10. The prepaid advertising account balance on December 31, 2010, is: 0

PROBLEM 6: The following accounts were gathered from the records of Masay Company, a
manufacturing entity engaged in production of equipments used by big factories abroad:
Sales P20,000,000 Ns+
Sales discount 100,000 Ns-
Sales returns and allowances 200,000 Ns-
Inventories – January 1
Raw materials 1,000,000
Goods in process 500,000
Finished goods 300,000
Inventories – December 31
Raw materials 1,200,000
Goods in process 750,000
Finished goods 375,000
Purchases 5,000,000 Np+
Direct labor 1,000,000 DL
Indirect labor 400,000 Oh
Factory superintendence 120,000 Oh
Factory light, heat and power 100,000 Oh
Rent – factory building 300,000 Oh
Repairs and maintenance – machinery 115,000 Oh
Factory supplies used 85,000 Oh
Sales staff salaries 455,000 D
Advertising 150,000 D
Depreciation – store equipment 100,000 D
Office salaries 1,000,000 GAE
Depreciation – office equipment 125,000 GAE
Depreciation – machinery 230,000 OH
Interest income 120,000 OI
Gain on sale of equipment 300,000 OI
Accounting and legal fees 213,000 GAE
Office maintenance 120,000 GAE
Office supplies used 35,000 GAE
Store supplies used 27,000 D
Earthquake loss 500,000 OE
Gain from expropriation of asset 315,000 OI
Income tax expense 900,000
Purchase discounts 120,000 NP-
Purchase returns and allowances 200,000 NP-
Rental income 560,000 OI
Freight out 322,000 D
Sales commission 230,000 D
 Dividends received from trading securities 344,000 OI
Freight in 422,000 NP+
Loss on sale of trading securities 124,000 OE
Loss from fire 400,000 OE
Interest on inventory loan 67,000 FIN
Loss on inventory writedown 600,000 COGS+
Dividends received from an associate 94,000 N/A
Dividends declared 900,000 N/A
Additional investment from owners 2,000,000 N/A
Donation from a non-shareholder with no
N/A
conditions attached 567,000
Donation from a shareholder 123,000 N/A
Property taxes and licenses 300,000 GAE
Doubtful accounts expense 455,000 GAE
Gain on early extinguishment of debt 750,000 FIN -
Understatement of depreciation in 2009 1,200,000 RE-
Share in net income of associate 775,000 INV INC
Dividends received from a subsidiary 124,500
Loss from major strike 500,000 OE
Unrealized gain on forward contracts designated
OCI+
as cash flow hedge 235,000
Unrealized gain on forward contracts designated
NONE
as fair value hedge 335,000
Interest expense on borrowings 890,000 FIN
Interest expense on borrowing used solely to
N/A
finance construction of a building 288,000
Revaluation surplus during the year 675,000 OCI+
Translation loss on foreign operation 980,000 OCI-
Appropriation of retained earnings 3,000,000 RE-
Change in accounting policy from FIFO to
RE+
weighted average – credit 350,000
Impairment loss on a building 908,000 IL
Impairment loss on goodwill 888,000 IL
Depreciation – office building 120,000 GAE
Insurance on office building 400,000 GAE
Unrealized gain on investments classified as
OCI+
financial asset at fair value through OCI 555,000
Actuarial gain or loss on defined benefit plan – full
NONE
recognition approach 120,000
Reclassification adjustment on an gain on forward
contract designated as cash flow hedge on
OCI+
which the related hedged item has been
realized or sold to an outside party 300,000

Considering the information given, determine the following amounts that should be reported by Masay
Company in its separate functional income statement and separate statement of comprehensive
income:
11. Net sales: __________________________19,700,000
12. Factory overhead: __________________________ 1,350,000
13. Cost of goods manufactured: __________________________ 7,002,000
14. Cost of goods sold: __________________________ 7,527,000
15. Gross income: __________________________ 12,173,000
16. Investment income: __________________________ 775,000
17. Other income: __________________________ 1,639,000 / 1,763,500
18. General and administrative expenses: __________________________ 2,768,000
19. Distribution costs: __________________________ 1,284,000
20. Finance costs: __________________________ 207,000
21. Other expenses: __________________________ 1,524,000
22. Net income: __________________________ 7,008,000 / 7,132,500
23. Other comprehensive income: __________________________ 785,000
24. Total comprehensive income: __________________________ 6,893,000 / 7,017,500
25. Amount excluded from the two statements: __________________________