FIN 461 EXAM 2 QUESTIONS ANSWERED CORRECTLY LATEST UPDATE 2026

FIN 461 EXAM 2 QUESTIONS ANSWERED CORRECTLY LATEST UPDATE 2026 What is the primary objective of an income statement? - Answers To present revenues, expenses, net income, and earnings per share. What are the two basic formats of an income statement? - Answers Multiple-step format and single-step format. What is a common-size income statement used for? - Answers To compare firms with different levels of sales and evaluate trends. What does net sales represent? - Answers Total revenue shown net of returns and allowances. What is the purpose of ASC Topic 606? - Answers To provide a framework for revenue recognition and improve comparability. What is gross profit? - Answers The difference between net sales and cost of goods sold (COGS). What does the gross profit margin indicate? - Answers The percentage of gross profit relative to net sales. What are operating expenses? - Answers Costs related to the management and sale of products and services. What is depreciation? - Answers The allocation of the cost of tangible fixed assets over their useful lives. What is amortization applied to? - Answers Finance leases, leasehold improvements, and the expiration of intangible assets. What is depletion? - Answers The allocation process applied to the acquisition and development of natural resources. What is an impairment charge? - Answers A recognized decline in the value of a long-term asset. What does the operating profit margin measure? - Answers The ratio of operating profit to net sales. What types of income are included in 'other income (expense)'? - Answers Dividend and interest income, interest expense, investment gains and losses. What is the equity method of accounting? - Answers Allows proportionate recognition of an invested company's net income. What is the cost method of accounting for investments? - Answers Recognition of investment income only to the extent of cash dividends received. What is the impact of sales returns and allowances on net sales? - Answers They reduce the total revenue reported as net sales. What is the significance of tracking operating expenses? - Answers It impacts current and future profitability and helps in trend analysis. What is the role of management in operating expenses? - Answers Management exercises discretion in determining and reporting these expenses. What is the difference between 'real' and 'nominal' sales growth? - Answers 'Real' sales growth is adjusted for inflation, while 'nominal' is as reported. What are unusual items in an income statement? - Answers Items that must be disclosed separately due to their nature or impact. What does the statement of stockholders' equity document? - Answers Changes in balance sheet equity accounts. What is the purpose of the statement of comprehensive income? - Answers To present all changes in equity during a period, including those not recognized in net income. What are the two types of revenue sources mentioned? - Answers Each revenue is shown separately with its corresponding cost of goods sold. What is the importance of tracking trends in operating expenses? - Answers It helps assess performance relative to sales and industry competitors. What is the relationship between gross profit and net sales? - Answers Gross profit is derived from net sales after deducting COGS. What are the two methods used to calculate investment income? - Answers Equity method and cost method What does GAAP no longer permit effective in 2016? - Answers Extraordinary item treatment How are unusual and infrequent items reported in financial statements? - Answers As separate line items within continuing operations What is the definition of earnings before taxes? - Answers Profit recognized before the deduction of income tax expense What is the effective tax rate? - Answers The ratio of income taxes to earnings before taxes What can companies operating at a loss do with their net operating losses? - Answers Carry forward losses indefinitely to offset taxable income in subsequent years What are discontinued operations? - Answers When a firm sells or discontinues a clearly distinguishable portion of its business What is net earnings also referred to as? - Answers The 'bottom line' How is net profit margin calculated? - Answers Net earnings divided by net sales What does earnings per share (EPS) measure? - Answers Net earnings divided by common shares outstanding What is the difference between basic EPS and diluted EPS? - Answers Diluted EPS accounts for convertible securities that could create new common shares What are some items included in the statement of comprehensive income? - Answers Foreign currency translation effects, unrealized gains and losses, additional pension liabilities, cash flow hedges What do stock dividends do to retained earnings? - Answers Reduce retained earnings account What is the purpose of a stock split? - Answers To lower the market price of shares to make common stock more affordable What is the five-step framework for revenue recognition? - Answers 1. Identify the contract with customer 2. Identify performance obligations 3. Determine contract price 4. Allocate contract price 5. Recognize revenue What is revenue recognition fraud? - Answers Improper revenue recognition, fictitious revenue, sending products ahead of demand, transactions involving third parties, fraudulent estimates by management What should the allowance for doubtful accounts reflect? - Answers Volume of credit sales, customer base and past experience, credit policies and collection practices, economic conditions What is the impact of underestimating bad debt expense? - Answers It will boost net income What is the difference between real and nominal growth? - Answers Real growth adjusts reported sales figures with the consumer price index (CPI) What does LIFO produce during periods of inflation? - Answers Lower earnings than FIFO or average cost What happens during base LIFO layer liquidations? - Answers More goods sold than purchased, inventories are decreasing What can impact the quality of profit margins? - Answers Loss recognitions on write-downs of inventories What is cookie jar accounting? - Answers Abuse of reserve accounts to manipulate earnings What are in-process research and development charges? - Answers One-time charges taken at the time of acquisition that can be written off immediately What are gains or losses from sales of assets considered? - Answers Included in net income but not part of normal operations What does equity income allow an investor to recognize? - Answers The investor's percentage ownership of the invested company as investment income What should be eliminated in accounting? - Answers One-time items and unusual infrequent items. How does the provision on the income statement differ from actual tax paid? - Answers The provision may not reflect the actual tax paid, highlighting the need to differentiate tax events' impact on net earnings. What should be excluded from future earnings? - Answers Discontinued operations.