Chapter F5: Tools of the Trade, Part II...Income Statement and
Statement of Owners' Equity
Multiple Choice
1.
The income statement --
format is very different for each type of business organization--the
proprietorship, partnership, and corporation.
is headed with a specific date.
*
will report a net loss if expenses exceed revenues.
reports the present condition of the company’s assets, liabilities, and
equity.
Hint for question 1
The income statement reports the profitability of a company over a period of
time. It assesses past performance. The balance sheet reports a “snapshot” of
the present condition of the company.
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2.
*
The item that appears on the multistep income statement but not on the
single-step income statement is --
gross margin.
net income.
cost of goods sold (COGS).
total revenues.
Hint for question 2
The multistep format highlights the gross margin and operating income subtotals
while the single-step format subtracts total expenses from total revenues. The
choice of format does not affect the amount reported for net income.
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3.
Revenues increase --
net income.
earned equity.
stockholders’ equity.
*
all of the above.
Hint for question 3
Revenues less expenses equal net income. Net income is another term for
earned equity. Earned equity increases stockholders’ equity.
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4.
Calculate gross margin and net income using the following information:
Revenues $100,000; COGS (cost of goods sold) $60,000; rent expense
$3,000; wage expense $7,000; and $5,000 in dividends.
Gross margin equals $90,000, and net income equals $30,000.
Gross margin equals $85,000, and net income equals $25,000.
*
Gross margin equals $40,000, and net income equals $30,000.
Gross margin equals $35,000, and net income equals $25,000.
Hint for question 4
Gross margin = sales revenue - cost of goods sold.Net income = sales revenue
- all expenses.
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5.
Stockholders’ equity is decreased by --
net income.
revenues.
contributions by stockholders.
*
dividends.
Hint for question 5
Contributions by owners and revenues increase owners’ equity, while expenses
and distributions to owners decrease owners’ equity.
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6.
The following statement is true regarding the statement of owners’
equity:
Proprietorships differentiate between contributed capital and earned
equity.
Corporations refer to the statement as the “Statement of Capital.”
The statement represents a flow--changes during a particular
accounting period.
*
Net income does not get reported on the statement of owners’
equity--only the income statement.
Hint for question 6
The statement of owners’ equity reports the change in the various owners’
equity accounts during the accounting period. The statement differs slightly
according to the organizational form of the company.
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7.
The following statement is true regarding distributions to owners:
Distributions to shareholders are referred to as drawings.
*
For all organizational forms, distributions decrease owners’ equity.
Distributions can be thought of as salaries paid to the owners.
All partners must take withdrawals that are proportionate to their
profit sharing arrangement.
Hint for question 7
Distributions to shareholders are referred to as dividends, while distributions
from proprietorships and partnerships are referred to as drawings or
withdrawals. Regardless of the form of organization, all distributions decrease
owners’ equity.
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8.
The following statement is true regarding distributions to owners:
Partners have less control over distributions than shareholders.
Shareholder distributions must be proportionate to the number of
shares owned.
*
To receive a corporate dividend, stock must be owned on the date of
declaration.
Corporate dividends reduce contributed capital and stockholders’
equity.
Hint for question 8
Proprietors and partners can individually decide on their distributions, whereas
in a corporation, the board of directors makes all decisions regarding dividends.
Corporate distributions must be proportionate to the number of shares owned.
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9.
The statement of retained earnings--
is more comprehensive than the statement of stockholders’ equity.
*
reports increases from net income and decreases from dividend
distributions.
is only used by partnerships.
is the same as the statement of capital for proprietorships and
partnerships.
Hint for question 9
The statement of stockholders’ equity reports changes in all stockholders’ equity
accounts, while the statement of retained earnings reports only changes in the
retained earnings account. Only corporations report retained earnings.
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10.
The following statement is true regarding the financial statements of a
proprietorship, partnership, or a corporation:
A partnership reports one capital account in the owners’ equity
section of the balance sheet.
Net income is arrived at differently depending on if the company is
organized as a proprietorship, partnership, or a corporation.
The financial statements for a proprietorship are very similar to the
financial statements of a corporation.
The statement of stockholders’ equity reports the change in all stock
accounts, additional paid-in capital accounts, retained earnings, and
other equity accounts for a corporation.
*
Hint for question 10
The financial statements for a proprietorship are very similar to the financial
statements of a partnership. The corporation uses the statement of
stockholders’ equity or statement of retained earnings rather than a statement of
capital.
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11.
*
The following statement is true regarding the articulation of the financial
statements:
Net income is reported on both the income statement and on the
statement of owners’ equity.
The ending balance on the statement of capital is used on the
income statement.
The ending balance on the statement of retained earnings is used on
the income statement.
Net income is reported both on the balance sheet and on the
statement of owners’ equity.
Hint for question 11
The three financial statements are linked. The income statement reports the
earnings of the company, and the balance sheet presents the current financial
position. The statement of owners’ equity links the other two financial
statements.
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12.
*
Use the following information to calculate ending retained earnings for
the year 2008: Beginning retained earnings $100,000; common stock
issued during the year $50,000; net income $30,000; dividend
distributions $10,000; and cash received from customers for services
provided $200,000.
$120,000
$170,000
$320,000
$370,000
Hint for question 12
Beginning retained earnings + net income - dividend distributions =
ending retained earnings.
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Submit for Grade
Chapter F5: Tools of the Trade, Part II...Income Statement and
Statement of Owners' Equity
True or False
1.
Net income is more useful for predicting the future than is operating
income.
TRUE
*
FALSE
Hint for question 1
Operating income denotes the results of a company’s ongoing primary business
activity. Net income reports primary and secondary business activities whether
ongoing or not.
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2.
*
Net income reported using the single-step format will be the same
amount as net income reported using the multistep format.
TRUE
FALSE
Hint for question 2
There are two accepted formats for the income statement--the single-step and
the multistep. Both formats report the same information simply summarized in a
different manner.
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3.
*
For a corporation to declare and pay dividends there must be both
sufficient cash and sufficient retained earnings.
TRUE
FALSE
Hint for question 3
Two criteria must be met before a corporation can pay a dividend: (1) there must
be sufficient cash to make the payment; and (2) the corporation’s balance in
retained earnings must exceed the dividend amount.
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4.
Retained earnings will be the same amount as cash.
TRUE
*
FALSE
Hint for question 4
Retained earnings are the profits that have not yet been distributed as dividends
to shareholders. The cash related to those profits is used to purchase
equipment, pay employees, pay off debt, etc. Those profits are used by the
business.
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5.
*
The statement of owners’ equity provides a bridge, or connection,
between the information provided by the income statement and the
information provided by the balance sheet.
TRUE
FALSE
Hint for question 5
Net income is reported on the income statement and also on the
statement of owners’ equity. The ending balance in owners’ equity is
also reported on the balance sheet.
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Chapter F5: Tools of the Trade, Part II...Income Statement and
Statement of Owners' Equity
Fill In The Blanks
1.
*
The income statement reports on the profitability over a period of time. It
assesses the __________ performance of a company.
past
future
present
current
Hint for question 1
When did the period of time occur?
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2.
*
__________ is/are an accounting element on the income statement that
reports the costs incurred, or the sacrifices required, to attain revenues.
Expenses
Liabilities
Equity
Assets
Hint for question 2
What types of accounts get reported on the income statement?
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3.
__________ income denotes the results of a merchandising or
manufacturing company’s ongoing primary business activity on a
multistep income statement.
Net
Gross
*
Operating
Sales
Hint for question 3
It is the difference between operating revenues and operating expenses.
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4.
Revenues and expenses make up __________ equity.
owners’
*
earned
contributed
stockholders’
Hint for question 4
How are revenues acquired?
5.
*
Shareholder A sold 100 shares of stock to Shareholder B. Shareholder B
received the next dividend payment, therefore, Shareholder B must have
owned the stock on or before the date of __________.
record
distribution
declaration
payment
Hint for question 5
Three important dates for dividends are the date of declaration, date of
record, and the payment date.
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Submit for Grade
Chapter F5: Tools of the Trade, Part II...Income Statement and
Statement of Owners' Equity
Essay Questions
1.
2.
Explain the primary purpose of the income statement. Record the income
statement equation. In your own words, describe each of the accounting
elements that make up the equation. List and describe two subtotals in the
multistep income statement that are not found on the single-step income
statement.
For a proprietorship, describe two transactions/events that increase the
capital account, and two transactions/events that decrease the capital
account. Describe how these same transactions/events would be recorded
for the corporate form of organization.
3.
The following events occurred during the year 2007, the first year of
business:
1. Issued 1,000 shares of no-par common stock for $30 per share.
2. Reported revenues of $20,000 and expenses of $15,000.
The following events occurred during the year 2008, the second year of
business:
1. Reported revenues of $50,000 and expenses of $40,000.
2. Declared and paid cash dividends totaling $3,000.
REQUIRED: For the year 2007 calculate net income, ending retained
earnings, and ending stockholders’ equity. For the year 2008 calculate net
income, ending retained earnings, and ending stockholders’ equity.
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