Chapter 3: Understanding the Income Statement
Multiple Choice Questions
1. The income statement presents information on the financial results of a company’ s business
activities.
a) Over a period of time
b) At a point in time
2. Under IFRS 15 Revenue is recognised using a
a) Two Step Model
b) Three Step Model
c) Four Step Model
d)Five Step Model
3. If the entity is primarily responsible for fulfilling the contract, then it is
a) Agent
b) Broker
c) Principal
4. Under Straight Line Method annual depreciation is calculated as
a) (Cost + Residual Value) / Estimated Useful Life
b) (Cost + Residual Value) x Estimated Useful Life
c) (Cost - Residual Value) / Estimated Useful Life
5. Company A plans to sell Plant B. Income from Plant B will be shown in Income Statement of A as
a) Unusual Item
b) Infrequent Item
c) Discontinued Operation
True or False
1. In FIFO method the items remaining in inventory at the end of the period are those most
recently purchased or produced.
a) True
b) False
2. Restructuring Charges in an Example of Infrequent Item
a) True
b) False
3. Agent has discretion in establishing prices for the specified goods or services.
a) True
b) False
4. Provision for doubtful amount is an expense.
a) True
b) False
5. Warranty expense should not be recorded in the period of sale
a) True
b) False
Numerical Questions
1.
Inventory Valuation:
McGuire Corporation uses the periodic inventory method and had the following inventory
information available:
Units Unit Cost Total Cost
Jan. 1 Beginning inventory 100 $4 $ 400
20 Purchase 500 $5 2,500
July 25 Purchase 100 $6 600
Nov. 20 Purchase 300 $7 2,100
1,000 $5,600
A physical count of inventory on December 31 revealed that there were 350 units on hand
which mean the company sold 650 units.
Instructions
Answer the following independent questions and show calculations supporting your answers.
a. Assume that the company uses FIFO. The value of the ending inventory at December 31 is
$__________
b. Assume that the company uses weighted average cost. The value of the ending inventory at
December 31 is $__________
2. Mark Ltd uses the periodic inventory system and the following information is given about
Material ‘X’. Ascertain the value of inventory at the end of month assuming the company uses.
a) First in First Out Method
b) Weighted Average Cost Method
Dec Units Unit Cost
1 Beginning inventory 5000 $50
5 Purchase 1000 $51
10 Purchase 2000 $53
25 Purchase 1000 $50
Units sold in the month of December is 7000
3. From the following accounts XYZ Company given below prepare a multiple step income
statement:
Account Amount
Net Sales 545,625
Dividends income 20,363
Gain on sale of equipment 7,200
General and administrative expense 54,450
Depreciation 15,625
Cost of goods sold 252,675
Equity losses 1800
Interest expense 17,325
Selling expenses 43,200
Income tax expense 66,184
Interest income 16,875
4. From the following balances of PQR Ltd prepare multistep income statement
Rent Income 12,500
Revenue 341,550
Salary Expense 34,500
Administrative Expenses 23,500
Depreciation 12,150
Cost of goods sold 129,750
Interest Expense 16,550
Loss on Sale of Machinery 12,500
Selling expenses 19,500
Income Tax 21,500
5. Raymond Limited purchased a new computer system for $80,000. It is estimated that the
computer will have an $8,000 residual value at the end of its 5-year useful service life. Straight
line method of depreciation will be used. Prepare a depreciation schedule that shows the annual
depreciation expense on the computer system.
6. Mark Ltd purchased a truck for $20,000. The truck has a residual value of $ 2,000 and life is 10
years. Ascertain the total depreciation for first two years.
Long Questions
1. Explain Doubtful Accounts and their accounting.
2. Explain Depreciation
3. State the steps in Revenue Recognition.
Answers
Multiple Choice Questions
1. A
2. D
3. C
4. C
5. C
True or False
1. True
2. True
3. False
4. True
5. False
Numerical Questions
1. FIFO:
Ending inventory $2,400
300 units @ $7 = $2,100
50 units @ $6 = 300
350 units $2,400
Weighted Average Method:
Ending inventory $1960
Weighted Average Cost per unit = 100 x 4 + 500 x 5 + 100 x 6 + 300 x7
100 + 500 + 100 +300
= 5600 = 5.6
1000
Ending Inventory = 350 x 5.6 = 1960
2. FIFO
Ending Inventor
1000 units @ $50 = $50,000
1000 units @ $53 = $53,000
2000 units $103,000
Weighted Average Cost
Weighted Average Cost per unit = 5000 x 50 +1000 x 51 + 2000 x 53 + 1000 x50
5000 + 100 + 2000 +1000
= 457,000 = 50.78
9000
Ending Inventory = 2000 x 50.78 = 101,556
3. Multiple Step Income Statement
Particulars Dh
I Net Sales 545,625
II Cost of goods sold 252,675
III Gross profit (I-II) 292,950
IV Operating Expenses
Selling expenses 43,200
General and administrative expense 54,450
Depreciation 15,625
Total Operating Expenses 113,275
V Operating Profit (III-IV) 179,675
VI Other Income/ (Expenses)
Dividends income 20,363
Gain on Sale of Equipment 7,200
Interest Income 16,875
Equity Loss -1,800
Total Other Income/ (Expenses) 42,638
VII Earnings before Interest and Tax (V + VI) 222,313
VIII Interest expense 17,325
IX Earnings before income taxes (VII-VIII) 204,988
X Income tax expense 66,184
XI Net Earnings (IX - X) 138,804
4. Multistep Income Statement
Particulars Dh
I Net Sales 341,550
II Cost of goods sold 129,750
III Gross profit (I-II) 211,800
IV Operating Expenses
Salary Expense 34,500
Administrative expense 23,500
Depreciation 12,150
Selling Expense 19,500
Total Operating Expenses 89,650
V Operating Profit (III-IV) 122,150
VI Other Income/ (Expenses)
Rent Income 12,500
Loss on Sale of Machinery -12,500
Total Other Income/ (Expenses) 0
VII Earnings before Interest and Tax (V + VI) 122,150
VIII Interest expense 16,550
IX Earnings before income taxes (VII-VIII) 105,600
X Income tax expense 21,500
XI Net Earnings (IX - X) 84,100
5. Annual Depreciation = (80000-8000)= 14400
5
Beginning Current Year Carrying Amount
Year of Year Depreciation
1 80,000 65,600
2 65,600 51,200
3 51,200 14,400 36,800
4 36,800 14,400 22,400
5 22,400 14,400 8,000
6. Annual Depreciation = ($20,000-$2,000)/ 10 = $1800
Total Depreciation for 2 years = $1,800 x 2 = $3,600