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Exam 4: The Income Statement, Comprehensive Income, and the Statement of Cash Flows

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Question 1

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Howard Co.'s 2013 income from continuing operations before income taxes was $280,000. Howard Co. reported a before-tax extraordinary gain of $50,000. All tax items are subject to a 40% tax rate. In its income statement for 2013, Howard Co. would show the following line-item amounts for net income and income tax expense:

A) $198,000 and $112,000.
B) $230,000 and $92,000.
C) $330,000 and $132,000.
D) $198,000 and $79,000.

E) A) and B)
F) A) and C)

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Question 2

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In a statement of cash flows prepared under International Financial Reporting Standards, interest paid is most often classified as a financing cash flow.

A) True
B) False

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Question 3

Multiple Choice

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Cash flows from financing activities include:

In the 2013 income statement for Foxtrot Co., it would report:

Explain, using an example, how a company can use earnings management and justify it by conservatism.

Net income, often referred to as "the bottom line," is not always a good predictor of future income. Explain this statement.

Hong Kong Clothiers reported revenue of $5,000,000 for its year ended December 31, 2013. Accounts receivable at December 31, 2012 and 2013, were $320,000 and $355,000, respectively. Using the direct method for reporting cash flows from operating activities, Hong Kong Clothiers would report cash collected from customers of:

Operating cash flows would exclude:

The following income statement items appeared on the adjusted trial balance of Foxworthy Corporation for the year ended December 31, 2013 ($ in 000s): sales revenue, $22,300; cost of goods sold, $14,500; selling expenses, $2,300; general and administrative expenses, $1,200; dividend revenue from investments, $200; interest expense, $300. Income taxes have not yet been accrued. The company's income tax rate is 40% on all items of income or loss. These revenue and expense items appear in the company's income statement every year. The company's controller, however, has asked for your help in determining the appropriate treatment of the following nonrecurring transactions that also occurred during 2013 ($ in 000s). All transactions are material in amount. 1. Investments were sold during the year at a loss of $300. Foxworthy also had unrealized losses of $200 for the year on investments. 2. One of the company's factories was closed during the year. Restructuring costs incurred were $2,000. 3. One of Foxworthy's manufacturing facilities located in a foreign country was expropriated. A loss of $800 was recognized. The event is considered to be unusual and infrequent. 4. During the year, Foxworthy completed the sale of one of its operating divisions that qualifies as a component of the entity according to GAAP regarding discontinued operations. The division had incurred operating income of $800 in 2013 prior to the sale, and its assets were sold at a loss of $1,800. 5. Foreign currency translation gains for the year totaled $600. Required: Prepare Foxworthy's single, continuous statement of comprehensive income for 2013, including basic earnings per share disclosures. Two million shares of common stock were outstanding throughout the year.

Required: Prepare a single-step income statement with basic earnings per share disclosure.

Shady Lane's income tax payable account decreased from $14 million to $12 million during 2013. If its income tax expense was $80 million, what was shown as an operating cash flow under the direct method?

On August 1, 2013, Rocket Retailers adopted a plan to discontinue its catalog sales division, which qualifies as a separate component of the business according to GAAP regarding discontinued operations. The disposal of the division was expected to be concluded by June 30, 2014. On January 31, 2014, Rocket's fiscal year-end, the following information relative to the discontinued division was accumulated: In its income statement for the year ended January 31, 2014, Rocket would report a before-tax loss on discontinued operations of:

The principal benefit of separately reporting discontinued operations and extraordinary items is to enhance:

Intraperiod income tax presentation is primarily a matter of:

In the 2013 income statement for Foxtrot Co., it would report income from discontinued operations of:

The statement of cash flows for the year ended December 31, 2013, for Whiteside Incorporated is presented below. Required: Prepare the statement of cash flows assuming that Whiteside prepares its financial statements according to International Financial Reporting Standards. Where IFRS allows flexibility, use the classification used most often in IFRS financial statements.

Expenses in an income statement prepared under International Financial Reporting Standards:

In comparing the direct method with the indirect method of preparing the statement of cash flows:

The division's book value and fair value less cost to sell on December 31 were $3,000,000 and $3,500,000, respectively. What before-tax amount(s) should Mercedes report as loss on discontinued operations in its 2013 income statement?

The definition of what constitutes an extraordinary item should be independent of the operating environment.