Multiple Choice

MC5-1. Lyon Company has the following transactions in the current year. Assuming that all of the transactions are material, which of them will most likely have no effect on the current year net income? a. The sale of a factory building was contributed by a shareholder in the prior year. b. The settlement of litigation over an accident that occurred in the prior year but for which a loss had not previously been considered to be probable and reasonably estimable. c. The determination that certain junk bonds purchased on a speculative basis several years previous were worthless. d. The collection of a receivable from a customer whose account was written off in the prior year by a charge to the allowance for bad debts account.

MC5-2. Moore Furniture Inc., a public company, has experienced a consistent 5% increase in net income over the past three years. Moores management team is under a lot of pressure from investors to maintain its earn-ings ratios. In order to do so, the CEO could manipulate net income in order to manage the earnings of the company. Which one of the following is not a method typically used to manage earnings? a. Acquire a related business to allow management the opportunity to restructure transactions. b. Move up the timing related to the launch of a new product that has a huge demand. c. Engage in research and development projects to entice investors. d. Recognize revenues prematurely from sales promotions with retailers.

MC5-3. Beach and Poole, CPA is reviewing income statement presentations with some interns that are working with the firm during the summer break. The interns were asked to list three things that were true about the multiple-step income statement. Choose the item below that is a true statement. a. The multiple-step income statement lists gains and losses as part of the income from normal operations. b. The multiple-step income statement shows income or loss from operations after the gross margin and operating expenses lines but before other revenues and gains. c. Freight out is classified as part of the inventory cost and moved to cost of goods sold when the item is purchased by a third party. d. Gain/loss on the sale of equipment held for disposal from discontinued operations is included in the continuing operations section of the income statement.