Chapter 6 practice

OCI applies only when an accounting rule sends a qualifying item there; a customer fee enters net income.

The installation is a service sold to customers, so its fee is revenue.

A gain reports a peripheral transaction, such as selling a warehouse; installation is a customer service.

The fee is earned from a customer; it is not a refund or reduction of the cost of providing the service.

Answer: b

The installation is a service sold to customers, so its fee is revenue.

The pay is a direct cost of the service sold. It reduces gross profit.

Selling expense covers work to obtain sales, not technicians performing the sold service.

The technicians carry out the company’s customer service, so their direct cost belongs above gross profit.

Technician pay is a cost of providing the service, not a refund, discount, or other reduction of revenue.

Answer: a

The pay is a direct cost of the service sold. It reduces gross profit.

The warehouse sale is outside the manufacturer’s customer sales and operating result. It does not increase gross profit.

Selling an asset used by the business is not a sale of its goods or services.

A warehouse-sale gain enters net income; calling it unusual does not send it to OCI.

The gain is sale proceeds less the warehouse's carrying amount. It is not a refund of an operating cost.

Answer: a

The warehouse sale is outside the manufacturer’s customer sales and operating result. It does not increase gross profit.

Interest is a financing cost. The chapter’s operating subtotal excludes it, but pretax income includes it.

Interest on borrowing is not the cost of goods or services sold to customers in this statement.

Interest expense enters net income; it is not an OCI component.

Interest expense is included in pretax income, so it appears before the income tax expense line.

Answer: a

Interest is a financing cost. The chapter’s operating subtotal excludes it, but pretax income includes it.

Income tax is not a direct cost of goods or services sold.

Income tax expense affects net income through continuing operations; it is not an after-net-income adjustment.

Tax expense is shown after the pretax result to reach after-tax income from continuing operations.

Income tax expense follows pretax income; it is not part of the operating-income subtotal.

Answer: c

Tax expense is shown after the pretax result to reach after-tax income from continuing operations.

Revenue is the starting amount; gross profit also deducts cost of revenue.

$800 − $470 = $330 thousand. Gross profit is revenue less the cost of what was sold.

That is cost of revenue, not the amount left after that cost.

This adds cost of revenue to revenue instead of subtracting the cost of what was sold.

Answer: b

$800 − $470 = $330 thousand. Gross profit is revenue less the cost of what was sold.

This adds the warehouse gain to operating income. The gain is reported below that subtotal.

Gross profit is $360 thousand ($900 − $540). Deduct the $150 thousand of operating expenses. The warehouse gain and interest expense appear below operating income.

This deducts interest expense too early. Interest expense appears below operating income in this statement.

This stops at gross profit and does not deduct selling and administrative expenses.

Answer: b

Operating income is $210 thousand ($900 − $540 − $150). The warehouse gain and interest expense enter later subtotals.

This deducts the OCI loss. OCI does not enter income before income taxes.

This leaves out the warehouse gain, which belongs below operating income but still enters pretax income.

Add the warehouse gain and interest income, then deduct interest expense: $210 + $12 + $35 − $30 = $227 thousand. OCI is outside net income.

This adds interest expense instead of deducting the financing cost from pretax income.

Answer: c

Pretax income is $227 thousand ($210 + $12 + $35 − $30). The OCI loss does not enter this subtotal.

$170 − $42 = $128 thousand. Use the supplied reported tax expense.

This is pretax income; it has not deducted income tax expense.

This is the reported tax expense, not the after-tax result.

This adds income tax expense to pretax income instead of deducting it.

Answer: a

$170 − $42 = $128 thousand. Use the supplied reported tax expense.

Income from continuing operations is $170 thousand ($227 − $57). Deduct the $24 thousand discontinued-operation loss. The OCI gain is outside net income.

This includes the OCI gain in net income. OCI contributes to comprehensive income instead.

This stops at income from continuing operations and omits the after-tax discontinued-operation loss.

This deducts both the discontinued-operation loss and the OCI gain. OCI is outside net income.

Answer: a

Net income is $146 thousand ($227 − $57 − $24). The $11 thousand OCI gain is excluded.

That is cost of revenue divided by revenue, not gross profit divided by revenue.

Dividing gross profit by cost of revenue uses the wrong denominator.

Gross profit is $380 thousand ($1,000 − $620). $380 ÷ $1,000 = 38%.

This divides revenue by cost of revenue. Gross margin uses gross profit divided by revenue.

Answer: c

Gross profit is $380 thousand ($1,000 − $620). $380 ÷ $1,000 = 38%.

Operating income is $210 thousand ($900 − $540 − $150). Divide by the same-period $900 thousand of revenue: 23.3%.

This includes the warehouse gain in operating income. The gain is below that subtotal.

This is gross margin, which excludes operating expenses.

This deducts the $30 thousand interest expense before calculating operating margin, but interest is below operating income.

Answer: a

Operating margin is 23.3%: $210 thousand of operating income ($900 − $540 − $150) divided by $900 thousand of revenue.

This uses income from continuing operations and omits the discontinued-operation gain from net income.

Continuing income is $120 thousand ($180 − $20 − $40). Add the $15 thousand discontinued-operation result, then divide $135 thousand of net income by $1,000 thousand of revenue.

This deducts the OCI loss from net income. OCI is outside net income and net profit margin.

This divides operating income by revenue. It is operating margin, not net profit margin.

Answer: b

Net profit margin is 13.5%: net income is $135 thousand ($180 − $20 − $40 + $15), and $135 ÷ $1,000 = 13.5%. The OCI loss is excluded.

The rates show changes in shares of revenue. They do not establish production efficiency, staffing actions, or whether a change will last.

The lower gross margin leaves less after cost of revenue per sales dollar. The higher operating margin means the operating-expense share fell enough to more than offset that change. The rates do not identify a cause.

A reclassification could change gross margin without changing operating margin, but the rates alone do not establish that it happened.

The rates describe different parts of the statement. A higher operating margin does not erase the gross-margin change or prove its cause.

Answer: b

The rates show a larger cost-of-revenue share and a smaller operating-expense share of revenue. They do not identify the business or accounting cause.

The $60 thousand is a change in gross profit dollars, not a margin rate.

Both dollar amounts rose, but gross profit grew more slowly than revenue. The second-year rate is 38%.

Gross profit rose from $320 to $380 thousand. The rates are $320 ÷ $800 = 40% and $380 ÷ $1,000 = 38%, so the manager’s rate claim is wrong.

The 47.5% figure divides second-year gross profit by first-year revenue, mixing amounts from different periods.

Answer: c

Gross profit rose from $320 to $380 thousand, but gross margin fell from 40% ($320 ÷ $800) to 38% ($380 ÷ $1,000).

Those amounts come after gross profit and cannot explain the gross-margin calculation.

Changes in direct input prices, selling prices, and the mix of products sold can each change gross margin. Comparing them helps test the stated cause.

Revenue can rise for several reasons. The revenue total alone does not establish a change in input prices.

Operating expenses appear below gross profit. They do not determine the gross-margin calculation.

Answer: b

Compare direct material prices and quantities, selling prices, and product mix before attributing the gross-margin decline to materials.

Pretax income includes the gain in either location. It is not overstated when the gain is counted once.

Gross profit and operating income both include customer revenue, so moving the gain there also changes those subtotals.

The gain wrongly enters revenue, so it raises gross profit and operating income. Moving it within the same statement does not change pretax income when counted once.

Operating income begins with gross profit, so the misplaced gain also raises operating income when no later correction is made.

Answer: c

Gross profit and operating income are each overstated by $25 thousand. Pretax income is unchanged because the gain remains included once.

A peripheral land-sale gain can still enter net income.

An isolated transaction is not an OCI category merely because it may not recur.

Continuing operations excludes qualifying discontinued operations; it does not exclude every isolated gain.

US GAAP does not permit a separate extraordinary-item section. An unusual gain can remain in continuing operations.

Answer: c

Continuing operations excludes qualifying discontinued operations; it does not exclude every isolated gain.

The same label can contain different costs across years. The classification change affects gross margin.

Moving a direct cost from operating expenses into cost of revenue lowers reported gross profit without changing operating income by itself. A consistent basis is needed to interpret the gross-margin change.

Even if net income is unchanged, a classification move can materially change gross profit and gross margin.

The classification change can lower gross margin even when technician pay does not change.

Answer: b

First identify which costs enter each year’s cost of revenue. The $80 thousand classification move changes gross profit and gross margin but, by itself, not operating income.

The lender also needs the cash balance, financing sources, payment date, and other cash demands. Operating cash flow alone does not settle capacity.

Net income is not a cash balance. The company may have earned revenue that customers have not yet paid.

The income statement does not show when customers pay. The lower operating cash flow and higher receivables make collections and obligations important to check.

Receivables show amounts owed by customers, not when or whether the company will collect enough cash.

Answer: c

Higher net income does not establish available cash. Check collections, current cash, payment terms, and other cash needs alongside the cash-flow statement.

The accounting rule for this security puts the holding gain in OCI while it is held.

The investment is not a good or service sold to customers.

A fair-value gain while held does not itself produce cash.

The holding gain enters OCI for the period and accumulates in AOCI; it does not go directly to retained earnings.

Answer: a

The accounting rule for this security puts the holding gain in OCI while it is held.

The recognized sale gain enters net income, and the related prior holding amount must be removed from AOCI.

A security sale is not a sale of goods or services to customers. Cash receipt does not make it customer revenue.

A recognized sale gain enters net income. The related prior holding amount leaves AOCI through a reclassification adjustment, so it is not left there after sale.

Leaving the related amount in AOCI fails to remove the prior holding gain through the required reclassification adjustment.

Answer: c

The recognized sale gain enters net income, and the related prior holding amount is reclassified out of AOCI.

A dividend is an owner distribution, not a translation adjustment.

The stated rule controls this item’s reporting path. A generic cash or realization test does not.

Translation of a foreign operation is not a customer sale.

Cash movement does not decide the reporting path. The stated accounting rule sends this adjustment to OCI.

Answer: b

The stated rule controls this item’s reporting path. A generic cash or realization test does not.

This includes the holding gain but omits the translation loss.

Net current-period OCI is a $5 thousand gain ($12 − $7). Add it to $90 thousand of net income.

This includes the translation loss but omits the holding gain.

This adds the holding gain and also adds the translation loss instead of subtracting it.

Answer: b

Comprehensive income is $95 thousand: $90 thousand of net income plus $5 thousand of net OCI ($12 − $7).

This adds the new holding gain but leaves the reclassified prior gain in AOCI.

This removes the prior gain but omits the new holding gain.

Add the new $8 thousand holding gain and remove the $5 thousand prior gain: $40 + $8 − $5 = $43 thousand.

This adds the $5 thousand reclassification instead of removing that prior gain from AOCI.

Answer: c

Ending AOCI is $43 thousand ($40 + $8 − $5). The reclassification removes a prior amount; it is not an additional new loss.