episode 10 exercise answer 02

Part 2: Solution

Let's see how well you answered the questions.

	1.	Companies may choose to use a multiple-step income statement for all of the reasons EXCEPT
		a. to communicate more clearly with users of financial statements.
		b. to highlight separately results of central operations and sideline activities.
		c. to hide poor results of operations.
		d. because other companies in the same industry use multiple-step statements.
		Your Answer:
		Correct Answer: c
		A multiple-step income statement uses more subsections, thereby generally revealing, rather than hiding, poor results. In particular, there will almost always be an operating section, with another section for other revenues and expenses. The operating section will highlight, rather than hide, results of operations.

	2.	Which of the following items would generally be included in the Other Revenues and Expenses section of a multiple-step income statement for CanGo?
		a. Cost of Books Sold
		b. Loss on sale of computers
		c. Marketing department salaries
		d. None of the above
		Your Answer:
		Correct Answer: b
		Although CanGo uses computers in its operations, it is not in the business of buying and selling computers. Therefore, losses (and gains) on sales of computers would typically be included in the Other Revenues and Expenses section.

	3.	What would be the typical order in CanGo's multiple-step income statement of the following subtotals: Income from Operations, Gross Margin, Total Operating Expenses, Total Other Revenues and Expenses, Income before Taxes?
		a. Income from Operations, Gross Margin, Total Operating Expenses, Total Other Revenues and Expenses, Income before Taxes.
		b. Gross Margin, Total Operating Expenses, Total Other Revenues and Expenses, Income before Taxes, Income from Operations.
		c. Gross Margin, Total Operating Expenses, Income from Operations, Total Other Revenues and Expenses, Income before Taxes.
		d. Income before Taxes, Income from Operations, Gross Margin, Total Other Revenues and Expenses, Total Operating Expenses.
		Your Answer:
		Correct Answer: c
		Gross Margin, Total Operating Expenses, Income from Operations, Total Other Revenues and Expenses, Income before Taxes.

	4.	Which of the following subtotals would generally appear on single-step income statements and multiple-step income statements of a company selling a physical product?
		a. Gross Margin
		b. Total Operating Expenses
		c. Total Other Revenues and Expenses
		d. Income from Operations
		e. Income before Taxes
		Your Answer:
		Correct Answer: e
		Even companies using a single-step income statement frequently show income taxes as a separate item, preceded by the subtotal Income before Taxes.

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