Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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1.
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Which concept of reporting income is referred to as
the "clean surplus" theory, which means the Retained Earnings Statement is clean of
Extraordinary Items?
a. | current operating performance income
concept | b. | current earnings income
concept | c. | all-extraordinary concept of
income | d. | all-inclusive concept of
income |
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2.
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Which of the following would be an argument for the current operating
performance concept of income?
a. | Annual income statements, taken for the life of the business, should, when added
together, represent total net income. | b. | Management and the independent auditors are in
a better position than outsiders to determine if there are unusual and extraordinary
items. | c. | There is a danger of possible income manipulation if material extraordinary items may
be omitted in the determination of income. | d. | Over a period of years, charges tend to exceed
credits from extraordinary events, and the omission of such items has the effect of indicating a
greater earning performance than actually achieved. |
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3.
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Under ARB No. 43, Chapter 8, how should material charges or credits specifically
related to operations of prior periods be reported in which financial
statement?
a. | Income statement as an extraordinary item. | b. | Retained earnings
statement | c. | Income statement as an ordinary item. | d. | Should not be reported in the financial
statements. |
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4.
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According to APB Opinion No. 9, which of the following should not be
treated as an extraordinary item?
a. | write-downs of receivables, inventories and research and development
costs | b. | a gain on the sale of an investment not acquired for resale | c. | a major devaluation
of a foreign currency | d. | a loss on the sale of a plant or a significant
segment of the business |
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5.
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Which of the following statements would differentiate APB No. 30 from APB No.
9?
a. | Identifying extraordinary items requires the exercise of
judgment. | b. | extraordinary items are events and transactions of material effects which would not
be expected to recur frequently | c. | extraordinary items will be of a character
significantly different from the typical or customary business activities of the
entity | d. | Environment is a primary consideration in determining whether an underlying
event or transaction is abnormal and significantly different |
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6.
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the write-off of goodwill would constitute an extraordinary item under
ARB No. 43,
Chapter 8
APB No. 30
a. |
Yes
Yes | b. |
No
Yes | c. |
Yes
No | d. |
No
No |
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7.
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The following pronouncements supported which concept of income, current
operating performance (COP) or all-inclusive (AI)?
ARB No. 43,
Chapter 8
APB No. 30
a. |
COP
COP | b. |
COP
AI | c. |
AI
COP | d. |
AI
AI |
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8.
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In APB No. 9, The Board concluded that net income should reflect all items of
profit and loss recognized during the period, with the exception of
a. | losses on disposal of a segment of business | b. | write offs of
goodwill | c. | losses from condemnation of property. | d. | adjustments of prior years’
income. |
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9.
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Engaging in the practice of income equalization (income manipulation, or income
smoothing)
a. | reduces the perception of risk. | b. | increases the cost of raising
capital. | c. | reduces the price of the company’s stock. | d. | is required by
gaap. |
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10.
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Arguments for all-inclusive income concept do not include:
a. | Material differences in the treatment of borderline cases may be a means of
accomplishing the equalization of income | b. | The users of the financial statements can make
their own additions or deductions for extraordinary items more effectively than can the management or
the independent accountant. | c. | It is difficult to report in any financial
statement sufficient data to afford a sound basis upon which the reader who does not have an intimate
knowledge of the facts can make a well-considered classification. | d. | Extraordinary items
are part of the earnings history of the company, and should be given weight in any effort to make
financial judgments with respect to the company. |
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