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Chapter 2: Question 3-10DQ (page 75)

Comparisons of income can be very difficult for two companies even though they sell the same products in equal volume. Why?

Short Answer

Expert verified

Income of two companies cannot be compared easily because of the inconsistencies in the accounting and reporting policies adopted by the company while recording the revenue.

Step by step solution

01

Income statement

Income statement is prepared to show the revenue earned by the company and the expenses incurred to earn that profit. It is a component of the financial statements.

02

Comparison of income between the two companies

The comparison of income is difficult because each company use different accounting policies or methods to record the revenue transactions. For example, some companies may defer the recognition of revenue that comes via installment plan while the some companies may record it all right away. Some companies may use LIFO accounting method to record inventory and some may use FIFO accounting method.

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Most popular questions from this chapter

At the end of January, Mineral Labs had an inventory of 775 units, which cost \(12 per unit to produce. During February, the company produced 900 units at a cost of \)16 per unit. If the firm sold 1,500 units in February, what was the cost of goods sold?

a. Assume LIFO inventory accounting.

Wright Lighting Fixtures forecasts its sales in units for the next four months as follows:

March

4,000

April

10,000

May

8,000

June

6,000

Wright maintains an ending inventory for each month in the amount of one and one-half times the expected sales in the following month. The ending inventory for February (March鈥檚 beginning inventory) reflects this policy. Materials cost \(7 per unit and are paid for in the month after production. Labor cost is \)3 per unit and is paid for in the month incurred. Fixed overhead is \(10,000 per month. Dividends of \)14,000 are to be paid in May. Eight thousand units were produced in February.

Complete a production schedule and a summary of cash payments for

March, April, and May. Remember that production in any one month is equal to

sales plus desired ending inventory minus beginning inventory.

U.S. Steal has the following income statement data:

Units sold

Total variable costs

Fixed costs

Total costs

Total revenue

Operating income (Loss)

60,000

\(120,000

\)50,000

\(170,000

\)360,000

$190,000

80,000

160,000

50,000

210,000

480,000

270,000

b. Confirm that your answer to part a is correct by recomputing DOL using Formula 5-3. There may be a slight difference due to rounding.

DOL=Q(P-VC)Q(P-VC)-FC

Q represents beginning units sold (all calculations should be done at this level). P can be found by dividing total revenue by units sold. VC can be found by dividing total variable costs by units sold.

Classify the following balance sheet items as current or noncurrent:

Retained earning

Bond payable

Accounts payable

Accrued wages payable

Prepaid expenses

Accounts receivable

Plant and equipment

Capital in excess of par

Inventory

Preferred stock

Common stock

Marketable security

Identify whether each of the following items increases or decreases cash flow:

Increase in accounts receivable

Decrease in prepaid expenses

Increase in notes payable

Increase in inventory

Depreciation expense

Dividend payment

Increase in investment

Increase in accrued expenses

Decrease in account payable
See all solutions

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