CHAPTER 3
INCOME STATEMENT, RELATED INFORMATION,
AND REVENUE RECOGNITION
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
1. The income statement is useful in assessing the risk or uncertainty of achieving future cash
flows.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
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.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
3. The transaction approach of measuring income focuses on the income-related activities that
have occurred during the period.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
4. Companies frequently report income tax expense separately as the last item before net
income on a single-step income statement.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
5. Revenues and gains increase both net income and stockholders’ equity.
Ans: T, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
6. The primary advantage of the multiple-step format lies in the simplicity of presentation and
the absence of any implication that one type of revenue or expense item has priority over
another.
Ans: F, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
7. Gross profit and income from operations are reported on a multiple-step but not on a single-
step income statement.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
8. Dividends declared on common and preferred stock are subtracted from net income in the
computation of earnings per share.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
9. The accounting profession has adopted a current operating performance approach to
income reporting.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
,3-2 Test Bank for Intermediate Accounting, Eighteenth Edition
10. Companies report the results of operations of a component of a business that will be
disposed of separately from continuing operations.
Ans: T, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Analysis: IFRS: None
11. Reporting comprehensive income in a combined statement suggests that the gains and
losses reported as other comprehensive income have the same status as traditional gains
and losses.
Ans: F, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
12. Discontinued operations and unusual gains and losses are both reported net of tax in the
income statement.
Ans: F, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
13. The phrase “income from continuing operations” is used only when gains or losses on
discontinued operations occur.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
14. Intraperiod tax allocation relates the income tax expense of a fiscal period to the specific
items that give rise to the amount of the tax provision.
Ans: T, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
15. A company that reports a discontinued operation item must report per share amounts for
this item.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
16. Comprehensive income includes all changes in equity during a period except those resulting
from distributions to owners.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
17. The components of other comprehensive income can be reported in the statement of
comprehensive income.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
18. Companies often restrict retained earnings to comply with contractual requirements or
current necessities.
Ans: T, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
19. Prior period adjustments can either be added or subtracted in the Statement of
Stockholders’ Equity.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
20. Retained earnings is decreased by net losses, dividends, and losses reported in other
comprehensive income.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
, Income Statement, Related Information, and Revenue Recognition 3-3
21. Accumulated other comprehensive income decreases total stockholders’ equity.
Ans: F, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
22. Revenue is recognized in the accounting period when the performance obligation is satisfied.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control:
Financial Statement Preparation, IFRS: None
23. The first step in the revenue recognition process is to identify the separate performance
obligations in the contract.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control:
Financial Statement Preparation, IFRS: None
24. Revenue from a contract with a customer cannot be recognized until a contract exists.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control:
Financial Statement Preparation, IFRS: None
25. If the performance obligation is not highly dependent on or interrelated with other
promises in the contract, each performance obligation should be accounted for separately.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control:
Financial Statement Preparation, IFRS: None
26. A performance obligation is a written guarantee in a contract to provide a product or
service to a customer.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control:
Financial Statement Preparation, IFRS: None
27. Companies rarely have to allocate the transaction price to more than one performance
obligation in a contract.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control:
Financial Statement Preparation, IFRS: None
28. When a company sells a bundle of goods at a discount, the discount should be allocated
to the product that caused the discount and not to the entire bundle.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control:
Financial Statement Preparation, IFRS: None
29. A company can only satisfy its performance obligations at a point in time.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control:
Financial Statement Preparation, IFRS: None
30. Fraudulent financial reporting is intentional or reckless conduct whether, by act or
omission, that results in materially misleading financial statements.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: Problem Solving, IMA: Reporting & Control: Financial Statement Analysis, IFRS: None
31. Influences in a company’s internal environment may include industry conditions, poor
internal control systems, or legal and regulatory considerations.
Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: Problem Solving, IMA: Reporting & Control: Financial Statement Analysis, IFRS: None
32. Earnings management generally makes income statement information more useful for
predicting future earnings and cash flows.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
, 3-4 Test Bank for Intermediate Accounting, Eighteenth Edition
33. The effects of error corrections from the current year are generally reported as other
comprehensive income.
Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
34. The effects of changes in accounting principles are generally reported as adjustments to the
beginning balance of Retained Earnings.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
35. Changes in estimates are adjusted through retained earnings.
Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
MULTIPLE CHOICE—Conceptual
36. The major elements of the income statement are
a. revenue, cost of goods sold, selling expenses, and general expenses.
b. operating section, nonoperating section, discontinued operations, and cumulative effect.
c. revenues, expenses, gains, and losses.
d. revenues, irregular items, and general expenses.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
37. Which of the following is not true about the information provided in the income statement?
a. It helps in evaluating the past performance of the enterprise.
b. It provides a basis for predicting future performance.
c. It helps assess the risk or uncertainty of generating future cash flows.
d. It helps in evaluating working capital.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
38. Which of the following is false about an income statement?
a. Items that cannot be measured reliably are not reported in the income statement.
b. It is used to measure the solvency of a company.
c. Income measurement involves judgment.
d. Income numbers are affected by the accounting methods employed.
Ans: B, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
S
39. 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.
Ans: D, LO: 1, Bloom: AP, Difficulty: Difficult, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
INCOME STATEMENT, RELATED INFORMATION,
AND REVENUE RECOGNITION
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
1. The income statement is useful in assessing the risk or uncertainty of achieving future cash
flows.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
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.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
3. The transaction approach of measuring income focuses on the income-related activities that
have occurred during the period.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
4. Companies frequently report income tax expense separately as the last item before net
income on a single-step income statement.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
5. Revenues and gains increase both net income and stockholders’ equity.
Ans: T, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
6. The primary advantage of the multiple-step format lies in the simplicity of presentation and
the absence of any implication that one type of revenue or expense item has priority over
another.
Ans: F, LO: 1, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
7. Gross profit and income from operations are reported on a multiple-step but not on a single-
step income statement.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
8. Dividends declared on common and preferred stock are subtracted from net income in the
computation of earnings per share.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
9. The accounting profession has adopted a current operating performance approach to
income reporting.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
,3-2 Test Bank for Intermediate Accounting, Eighteenth Edition
10. Companies report the results of operations of a component of a business that will be
disposed of separately from continuing operations.
Ans: T, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Analysis: IFRS: None
11. Reporting comprehensive income in a combined statement suggests that the gains and
losses reported as other comprehensive income have the same status as traditional gains
and losses.
Ans: F, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
12. Discontinued operations and unusual gains and losses are both reported net of tax in the
income statement.
Ans: F, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
13. The phrase “income from continuing operations” is used only when gains or losses on
discontinued operations occur.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
14. Intraperiod tax allocation relates the income tax expense of a fiscal period to the specific
items that give rise to the amount of the tax provision.
Ans: T, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation,
AICPA PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
15. A company that reports a discontinued operation item must report per share amounts for
this item.
Ans: T, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
16. Comprehensive income includes all changes in equity during a period except those resulting
from distributions to owners.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
17. The components of other comprehensive income can be reported in the statement of
comprehensive income.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
18. Companies often restrict retained earnings to comply with contractual requirements or
current necessities.
Ans: T, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
19. Prior period adjustments can either be added or subtracted in the Statement of
Stockholders’ Equity.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
20. Retained earnings is decreased by net losses, dividends, and losses reported in other
comprehensive income.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
, Income Statement, Related Information, and Revenue Recognition 3-3
21. Accumulated other comprehensive income decreases total stockholders’ equity.
Ans: F, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
22. Revenue is recognized in the accounting period when the performance obligation is satisfied.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control:
Financial Statement Preparation, IFRS: None
23. The first step in the revenue recognition process is to identify the separate performance
obligations in the contract.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control:
Financial Statement Preparation, IFRS: None
24. Revenue from a contract with a customer cannot be recognized until a contract exists.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control:
Financial Statement Preparation, IFRS: None
25. If the performance obligation is not highly dependent on or interrelated with other
promises in the contract, each performance obligation should be accounted for separately.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control:
Financial Statement Preparation, IFRS: None
26. A performance obligation is a written guarantee in a contract to provide a product or
service to a customer.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control:
Financial Statement Preparation, IFRS: None
27. Companies rarely have to allocate the transaction price to more than one performance
obligation in a contract.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control:
Financial Statement Preparation, IFRS: None
28. When a company sells a bundle of goods at a discount, the discount should be allocated
to the product that caused the discount and not to the entire bundle.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control:
Financial Statement Preparation, IFRS: None
29. A company can only satisfy its performance obligations at a point in time.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting & Control:
Financial Statement Preparation, IFRS: None
30. Fraudulent financial reporting is intentional or reckless conduct whether, by act or
omission, that results in materially misleading financial statements.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: Problem Solving, IMA: Reporting & Control: Financial Statement Analysis, IFRS: None
31. Influences in a company’s internal environment may include industry conditions, poor
internal control systems, or legal and regulatory considerations.
Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: Problem Solving, IMA: Reporting & Control: Financial Statement Analysis, IFRS: None
32. Earnings management generally makes income statement information more useful for
predicting future earnings and cash flows.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA
PC: None, IMA: Reporting & Control: Financial Statement Preparation, IFRS: None
, 3-4 Test Bank for Intermediate Accounting, Eighteenth Edition
33. The effects of error corrections from the current year are generally reported as other
comprehensive income.
Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
34. The effects of changes in accounting principles are generally reported as adjustments to the
beginning balance of Retained Earnings.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
35. Changes in estimates are adjusted through retained earnings.
Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
MULTIPLE CHOICE—Conceptual
36. The major elements of the income statement are
a. revenue, cost of goods sold, selling expenses, and general expenses.
b. operating section, nonoperating section, discontinued operations, and cumulative effect.
c. revenues, expenses, gains, and losses.
d. revenues, irregular items, and general expenses.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
37. Which of the following is not true about the information provided in the income statement?
a. It helps in evaluating the past performance of the enterprise.
b. It provides a basis for predicting future performance.
c. It helps assess the risk or uncertainty of generating future cash flows.
d. It helps in evaluating working capital.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
38. Which of the following is false about an income statement?
a. Items that cannot be measured reliably are not reported in the income statement.
b. It is used to measure the solvency of a company.
c. Income measurement involves judgment.
d. Income numbers are affected by the accounting methods employed.
Ans: B, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
S
39. 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.
Ans: D, LO: 1, Bloom: AP, Difficulty: Difficult, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting &
Control: Financial Statement Preparation, IFRS: None
