Using the information provided, calculate net income for 2013. Assume a tax rate of 35 percent.
Year 2013
Inventory $5,000
Revenues 200,000
Depreciation expense 5,000
Cost of goods sold 100,000
Interest expense 10,000
Operating expenses 30,000
A) $35,750
B) $44,000
C) $50,000
D) $19,250
The practice of shifting income from good years to poor years in order to show a record of steady growth is
A) known as earnings management and is considered unethical.
B) highly recommended but not required by GAAP.
C) a basic requirement of accrual accounting.
D) impossible if Generally Accepted Accounting Principles are followed.
Firms should compare their gross, operating and net profit margins to past years and other companies in order to
A) evaluate the firm's performance.
B) identify expenses that seem to be out-of-line
C) better manage the reporting of the firm's earnings.
D) Both A and B.
The income statement represents a snapshot of account balances at one point in time.
Answer: FALSE
Generally Accepted Accounting Principles (GAAP) require companies to smooth earnings by shifting some profits from good years to bad years.
Answer: FALSE
The income statement describes the financial performance of a firm over a fixed period such as a quarter or a year.
Answer: TRUE
On an accrual basis income statement, revenues and expenses always match the firm's cash flow.
Answer: FALSE
Corporate income statements are usually compiled on an accrual, rather than cash, basis.
Answer: TRUE
