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Chapter 4: 7 (page 179)
How can earnings management affect the quality of earnings?
The quality of earnings is negatively affected by earnings management. Earnings management lowers the reliability element of income.
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What effect does intraperiod tax allocation have on reported net income?
Presented below are changes in all the account balances of Fritz Mayhew Furniture Co. during the current year, except for retained earnings.
Increase Increase
(Decrease) (Decrease)
Cash \(79,000 Accounts Payable
Accounts Receivable (net) \)45,000 Bonds Payable \(82,000
Inventory \)127,000 Common Stock \(125,000
Investments (47,000) Paid-In Capital in Excess of Par \)13,000
Instructions
Compute the net income for the current year, assuming that there were no entries in the Retained Earnings account except for net income and a dividend declaration of $19,000 which was paid in the current year.
Question: Counting Crows Inc. provided the following information for the year 2017.
Retained earnings, January 1, 2017 $600,000
Administrative expenses 240,000
Selling expenses 300,000
Sales revenue 1,900,000
Cash dividends declared 80,000
Cost of goods sold 850,000
Loss on discontinued operations 110,000
Rent revenue 102,700
17,000
Income tax applicable to continuing operations 187,000
Income tax benefit applicable to loss on discontinued operations 60,500
Income tax applicable to unrealized holding
gain on available-for-sale securities 2,000
Accounting
Prepare
(a) a single-step income statement for 2017,
(b) a retained earnings statement for 2017, and
(c) a statement of comprehensive income using the two statement format. Shares outstanding during 2017 were 100,000.
Analysis
Explain how a multiple-step income statement format can provide useful information to a financial statement user.
Principles
In a recent meeting with its auditor, Counting Crows鈥� management argued that the company should be able to prepare a pro forma income statement with some one-time administrative expenses reported similar to discontinued operations. Is such reporting consistent with the qualitative characteristics of accounting information as discussed in the conceptual framework? Explain.
(Multiple-Step Statement) The following balances were taken from the books of Alonzo Corp. on December 31, 2017.
Interest revenue \(86,000 Accumulated depreciation equipment \)40,000
Cash \(51,000 Accumulated depreciation鈥攂uildings \)28,000
Sales revenue \(1,380,000 Notes receivable \)155,000
Accounts receivable \(150,000 Selling expenses \)194,000
Prepaid insurance \(20,000 Accounts payable \)170,000
Sales returns and allowances \(150,000 Bonds payable \)100,000
Allowance for doubtful accounts \(7,000 Administrative and general expense \)97,000
Sales discounts \(45,000 Accrued liabilities \)32,000
Land \(100,000 Interest expense \)60,000
Equipment \(200,000 Notes payable \)100,000
Buildings \(140,000 Loss from earthquake damage \)150,000
Cost of goods sold \(621,000 Common stock \)500,000
Retained earnings $21,000
Assume the total effective tax rate on all items is 34%.
Instructions
Prepare a multiple-step income statement; 100,000 shares of common stock were outstanding during the year.
Simpson Corp. is an entertainment firm that derives approximately 30% of its income from the Casino Knights Division, which manages gambling facilities. As an auditor for Simpson Corp., you have recently overheard the following discussion between the controller and financial vice president.
Vice President: If we sell the Casino Knights Division, it seems ridiculous to segregate the results of the sale in the income statement. Separate categories tend to be absurd and confusing to the stockholders. I believe that we should simply report the gain on the sale as other income or expense without detail.
Controller: Professional pronouncements would require that we report this information separately in the income statement. If a sale of this type is considered unusual and infrequent, it must be reported separate from income from continuing operations.
Vice President: What about the walkout we had last month when employees were upset about their commission income? Would this situation not also be subject to reporting outside operating income?
Controller: I am not sure whether this item should get special reporting or not.
Vice President: Oh well, it doesn鈥檛 make any difference because the net effect of all these items is immaterial, so no disclosure is necessary.
Instructions
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