episode 10 exercise answer 01

Part 1: Solution

Apply what you have learned about how CanGo's growth has affected its use of income statements to the following questions.

Let's see how well you answered the questions.

	1.	The Net Income CanGo shows on a single-step income statement will be different than what would be shown on a multiple-step income statement.
		Your Answer:
		Correct Answer: False
		Net income, the bottom line, will be the same regardless of how the information is presented. The multiple-step income statement will simply have several subcategories that guide the user to understanding different aspects of CanGo's business, as it becomes more complex.

	2.	As CanGo grows in size and complexity, it must use a multiple-step income statement.
		Your Answer:
		Correct Answer: False
		Any company can use any statement format it decides is best. The reason for different statement formats is to facilitate communication. If a large company is fairly simple, having one major business activity and only common stock as a source of capital, using a multiple-step income statement may not pass the cost/benefit test. That is, it will add greater complexity to preparation and use, and not give much more information. On the other hand, a medium-sized company might sell goods and provide services, as well as use long-term bank loans and common stock as sources of financing. It might find a multiple-step statement would help users understand its results of operations. As CanGo becomes more complex, it is more likely that it will find a multiple-step income statement to be a good communication tool, but it may also determine that using a multiple-step statement is not worthwhile.

	3.	In the past, when CanGo sold only books, Gross Margin on its income statement was equal to Sales minus Cost of Books Sold.
		Your Answer:
		Correct Answer: True
		Gross Margin is equal to sales less the cost of goods sold. If CanGo at one time sold only books, the title Cost of Books Sold could have been used instead of Cost of Goods Sold.

	4.	CanGo has at times rented empty office space to occasional short-term tenants. The prepaid rent from this activity would be included in the Other Revenues section of a multiple-step income statement, while for an office building rental company, it would be shown as part of regular revenue.
		Your Answer:
		Correct Answer: False
		Prepaid rent is an asset account, appearing on the balance sheet, not the income statement. Rental revenue would probably be included in the Other Revenues section for CanGo, but it would be the major revenue item, the first line of the income statement, for a landlord.

	5.	All companies include the same items in Other Revenues and Expenses if they use such a category.
		Your Answer:
		Correct Answer: False
		Most companies include interest revenue and expense in the other revenues and expenses section, but banks would not, as interest revenue and expense result from their central activities. What will be included in the other revenue and expense section is determined in part by what a company does as its major line of business.

	6.	A service firm, that is, a firm that doesn't sell a physical product, would never use a multiple-step income statement.
		Your Answer:
		Correct Answer: False
		Although a service firm doesn't have cost of goods sold, and therefore wouldn't generally use a multiple-step income statement with a gross margin subtotal, such a firm could have other revenue and expense items it would want to isolate from results of operations.

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