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Income Statement (Practice Quiz)

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Author:
Harold Averkamp, CPA, MBA

For multiple-choice and true/false questions, simply press or click on what you think is the correct answer. For fill-in-the-blank questions, press or click on the blank space provided.

If you have difficulty answering the following questions, learn more about this topic by reading our Income Statement (Explanation).


1.
Which of the following names is NOT associated with the income statement?

P & L

Wrong.
P&L is often used when referring to the income statement.

Statement of financial position

Right!
The statement of financial position is NOT associated with the income statement. It is associated with the balance sheet.

Statement of operations

Wrong.
This name is used instead of income statement.
2.
The income statement heading will specify which of the following?

A POINT in time

Wrong.
A balance sheet's heading is a point in time.

A PERIOD of time

Right!
An income statement covers the period of time shown in its heading.
3.
Amounts earned by a company in its main operating activities are known as __________.

revenues

Right!
This is the correct answer.

gains

Wrong.
Gains pertain to items outside of the main operations.
4.
A company disposes of equipment that it no longer uses in its business. The amount received by the company is more than the amount the asset is carried at in the accounting records. The company will report a(n) __________.

expense

Wrong.
Expenses are associated with the main operations of a company... not with the disposal of long-term assets.

gain

Right!
Because the sale of equipment is outside of the main business activity and the amount received was greater than the amount at which the asset was carried in the company books, it is reported as a gain. The amount of the gain is the amount by which the proceeds exceeds the carrying amount.

loss

Wrong.
To have a loss the proceeds would have to be less than the carrying amount.

revenue

Wrong.
Revenues involve the main operations of the company... not with the disposal of long-term assets.
5.
On December 1 a large corporation borrowed $100,000 at 12% per year. The interest will be paid quarterly, with the first payment due on March 1. What should the corporation report on its income statement for December?

Nothing

Wrong.
The corporation is incurring (having) interest expense every day that the loan is outstanding. The December income statement must report one month's interest expense.

Interest Expense of $1,000

Right!
The income statement must report the interest incurred regardless of the date the interest is paid. $100,000 X .12 X 1/12 = $1,000.
6.
Is a retailer's Interest Expense an operating expense or a non-operating expense?

Operating expense

Wrong.
Interest is associated with the finance function, not the main activity of buying/producing and selling.

Non-operating expense

Right!
Interest is associated with the finance function, which is not the main operations of the company.
7.
The income statement line gross profit will appear on which income statement format?

Single-step

Wrong.
There is no subtotal in the single-step income statement.

Multiple-step

Right!
It will appear as the result of subtracting the cost of goods sold from net sales.
8.
Which income statement format segregates the operating revenues and expenses from the non-operating revenues and expenses?

Single-step

Wrong.
The single-step statement shows operating and non-operating revenues in one group, and it shows operating and non-operating expenses as another group.

Multiple-step

Right!
Multiple-step shows operating revenues and expenses separate from the non-operating revenues and expenses.
9.
Interest earned on investments would appear in which section of a retailer's multiple-step income statement?

Non-operating

Right!
Interest revenue is outside of a company's main operations.

Operating

Wrong.
Interest earned is a non-operating revenue.

Would not appear

Wrong.
Interest earned would appear in the non-operating section.
10.
Under the accrual basis of accounting, revenues are recognized in the accounting period in which __________.

cash is received

Wrong.
Under the accrual basis of accounting, revenues are recognized when the revenues are earned, not when the cash is received.

revenues are earned

Right!
Under the accrual basis of accounting, revenues are recognized when earned.
11.
Net sales minus the cost of goods sold is __________.

gross profit

Right!

income from operations

Wrong.
Operating Income is Gross Profit minus Operating Expenses.

net income

Wrong.
12.
The combination of net income + other comprehensive income is known as __________ income.

comprehensive

Right!

net

Wrong.

total

Wrong.
13.
Which basis of accounting best measures profitability during a short time interval?

Accrual basis

Right!

Cash basis

Wrong.
When cash is collected does not determine when sales and service revenues have been earned. When payments are made does not determine when expenses are incurred.
14.
Gross profit minus operating expenses is best defined as __________.

net income

This is not the best answer.
This could be true if there were no non-operating revenues and expenses.

net sales

Wrong.
Net Sales is Gross Sales minus Sales Discounts and Sales Returns and Allowances.

operating income

Right!
15.
What is defined as sales minus all variable expenses?

Contribution margin

Right!

Gross profit

Wrong.

Net income

Wrong.
16.
Are the draws of a sole proprietor reported as an expense on the company's income statement?

Yes

Wrong.

No

Right!
17.
A corporation's net income will cause an increase to which of the following?

Accumulated other comprehensive income

Wrong.

Common stock

Wrong.

Retained earnings

Right!
18.
If a company's stock is publicly traded, is it a requirement that the earnings per share appear on the income statement?

Yes

Right!
The earnings per share must appear on the income statement if a corporation's stock is publicly traded.

No

Wrong.
The earnings per share must appear on the income statement if a corporation's stock is publicly traded.
19.
Are the notes to the financial statements considered to be an integral part of the financial statements?

Yes

Right!
The notes are an integral part of the statements.

No

Wrong.
The notes are an integral part of the statements.
20.
Is it acceptable that some of the expenses reported on the income statement be estimates?

Yes

Right!
Depreciation Expense is an example of a significant expense that is an estimate.

No

Wrong.
Depreciation Expense and Bad Debts Expense are examples of expenses that are estimates.
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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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