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Chapter 4: Q11Q (page 179)

What are the advantages and disadvantages of the single-step income statement?

Short Answer

Expert verified

Simplicity, understandability by a layperson, focuses primarily on revenues, and expenses are the various advantages. The absence of showing relationships between the cost of goods sold and sales is considered a disadvantage of a single-step income statement.

Step by step solution

01

Meaning of Single-Step Income statement

The single-step income statement is a format used to report the revenues and expenses of a company. It includes only two major groups, i.e., revenues and expenses.

02

Advantages and disadvantages of a single-step income statement

The advantages of a single-step income statement are this statement format is very simple to present and can be easily understood even by the layperson. This income statement only focuses on the net income calculated by deducting all the expenses from the revenues. The major disadvantage of the single-step income statement is the absence of showing the important relationship between sales revenue and the cost of goods sold. It also excludes the potential classifications such as income from operations, income after and before taxes, etc.

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Most popular questions from this chapter

The following financial statement was prepared by employees of Walters Corporation.

WALTERS CORPORATION

INCOME STATEMENT

THE YEAR ENDED DECEMBER 31, 2017

Revenues

Gross sales, including sales taxes \(1,044,300

Less: Returns, allowances, and cash discounts 56,200

Net sales 988,100

Dividends, interest, and purchase discounts 30,250

Recoveries of accounts written off in prior years 13,850

Total revenues 1,032,200

Costs and expenses

Cost of goods sold, including sales taxes 465,900

Salaries and related payroll expenses 60,500

Rent 19,100

Delivery expense and freight in 3,400

Bad debt expense 27,800

Total costs and expenses 576,700

Income before other items 455,500

Other items

Loss on discontinued styles (Note 1) 71,500

Loss on sale of marketable securities (Note 2) 39,050

Loss on sale of warehouse (Note 3) 86,350

Total other items 196,900

Net income \)258,600

Net income per share of common stock \(2.30

Note 1: New styles and rapidly changing consumer preferences resulted in a \)71,500 loss on the disposal of discontinued styles and related accessories.

Note 2: The Corporation sold an investment in marketable securities at a loss of \(39,050. The corporation normally sells securities of this nature.

Note 3: The Corporation sold one of its warehouses at an \)86,350 loss.

Instructions

Identify and discuss the weaknesses in classification and disclosure in the single-step income statement above. You should explain why these treatments are weaknesses and what the proper presentation of the items would be in accordance with GAAP.

Question: Willie Nelson, Jr., controller for Jenkins Corporation, is preparing the company鈥檚 financial statements at year-end. Currently, he is focusing on the income statement and determining the format for reporting comprehensive income. During the year, the company earned net income of \(400,000 and had unrealized gains on available-for-sale securities of \)15,000. In the previous year, net income was $410,000, and the company had no unrealized gains or losses.

Instructions

(a) Show how income and comprehensive income will be reported on a comparative basis for the current and prior years, using the two statement format.

(b) Show how income and comprehensive income will be reported on a comparative basis for the current and prior years, using the one statement format.

(c) Which format should Nelson recommend?

The following account balances were included in the trial balance of Twain Corporation at June 30, 2017.

Sales revenue \(1,578,500

Depreciation expense (office furniture and equipment) \)7,250

Sales discounts \(31,150

Cost of goods sold \)896,770

Property tax expense \(7,320

Salaries and wages expense (sales) \)56,260

Bad debt expense (selling) \(4,850

Sales commissions \)97,600

Maintenance and repairs expense (administration) \(9,130

Travel expense (salespersons) \)28,930

Delivery expense \(21,400

Office expense \)6,000

Entertainment expense \(14,820

Sales returns and allowances \)62,300

Telephone and Internet expense (sales) \(9,030

Dividends received \)38,000

Depreciation expense (sales equipment) \(4,980

Interest expense \)18,000

Maintenance and repairs expense (sales) \(6,200

Income tax expense \)102,000

Miscellaneous selling expenses \(4,715

Depreciation understatement due to error鈥�2014 (net of tax) \)17,700

Office supplies used \(3,450

Telephone and Internet expense (administration) \)2,820

Dividends declared on preferred stock \(9,000

Dividends declared on common stock \)37,000

The Retained Earnings account had a balance of $337,000 at July 1, 2016. There are 80,000 shares of common stock outstanding.

Instructions

(b) Using the single-step form, prepare an income statement and a retained earnings statement for the year ended June 30, 2017.

Cooper Investments reported an unusual gain from the sale of certain assets in its 2017 income statement. How does intra period tax allocation affect the reporting of this unusual gain?

Perlman Land Development, Inc. purchased land for \(70,000 and spent \)30,000 developing it. It then sold the land for \(160,000. Sheehan Manufacturing purchased land for a future plant site for \)100,000. Due to a change in plans, Sheehan later sold the land for \(160,000. Should these two companies report the land sales, both at gains of \)60,000, in a similar manner?
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