The following questions are used in the Kaplan CPA Review Course to study the income statement and statement of cash flows while preparing for the CPA examination. Determine the response that best completes the statements or questions.

1. Roco Company manufactures both industrial and consumer electronics. Due to a change in its strategic focus, the company decided to exit the consumer electronics business, and in 2011 sold the division to Sunny Corporation. The consumer electronics division qualifies as a component of the entity according to GAAP. How should Roco report the sale in its 2011 income statement?

a. Include in income from continuing operations as a non-operating gain or loss.

b. As an extraordinary item.

c. As a discontinued operation, reported below income from continuing operations.

d. None of the above.

2. Bridge Company's results for the year ended December 31, 2011, include the following material items:

Sales revenue ........................ $5,000,000

Cost of goods sold ....................... 3,000,000

Administrative expenses ..................... 1,000,000

Gain on sale of equipment ...................... 200,000

Loss on discontinued operations ................... 400,000

Loss from earthquake damage (unusual and infrequent event) ........ 500,000

Understatement of depreciation expense in 2010 caused by mathematical error 250,000

Bridge Company's income from continuing operations before income taxes for 2011 is:

a. $700,000

b. $950,000

c. $1,000,000

d. $1,200,000

3. In Baer Food Co.'s 2011 single-step income statement, the section titled “Revenues” consisted of the following:

Net sales revenue ................. $187,000

Income on discontinued operations including gain on

disposal of $21,000 and net taxes of $6,000 ..... 12,000

Interest revenue .................... 10,200

Gain on sale of equipment ................ 4,700

Extraordinary gain net of $750 tax effect ......... 1,500

Total revenues .................. $215,400

In the revenues section of the 2011 income statement, Baer Food should have reported total revenues of

a. $201,900

b. $203,700

c. $215,400

d. $216,300

4. On November 30, 2011, Pearman Company committed to a plan to sell a division that qualified as a component of the entity according to GAAP, and was properly classified as held for sale on December 31, 2011, the end of the company's fiscal year. The division was tested for impairment and a $400,000 loss was indicated. The division's loss from operations for 2011 was $1,000,000. The final sale was expected to occur on February 15, 2012. What before-tax amount(s) should Pearman report as loss on discontinued operations in its 2011 income statement?

a. $1,400,000 loss.

b. $400,000 loss.

c. None.

d. $400,000 impairment loss included in continuing operations and a $1,000,000 loss from discontinued operations.

5. For 2010, Pac Co. estimated its two-year equipment warranty costs based on $100 per unit sold. Experience during 2011 indicated that the estimate should have been based on $110 per unit. The effect of this $10 difference from the change in estimate is reported

a. As an accounting change below 2011 income from continuing operations.

b. As an accounting change requiring the 2011 financial statements to be restated.

c. As a correction of an error requiring 2011 financial statements to be restated.

d. In 2011 income from continuing operations.

6. Which of the following items is not considered an operating cash flow in the statement of cash flows?

a. Dividends paid to stockholders.

b. Cash received from customers.

c. Interest paid to creditors.

d. Cash paid for salaries.

7. Which of the following items is not considered an investing cash flow in the statement of cash flows?

a. Purchase of equipment.

b. Purchase of securities.

c. Issuing common stock for cash.

d. Sale of land.