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Question: O鈥橫alley Corporation was incorporated and began business on January 1, 2017. It has been successful and now requires a bank loan for additional working capital to finance expansion. The bank has requested an audited income statement for the year 2017. The accountant for O鈥橫alley Corporation provides you with the following income statement which O鈥橫alley plans to submit to the bank.

O鈥橫ALLEY CORPORATION

INCOME STATEMENT

Sales revenue \(850,000

Dividends 32,300

Gain on recovery of insurance proceeds from

earthquake loss 38,500

920,800

Less:

Selling expenses \)101,100

Cost of goods sold 510,000

Advertising expense 13,700

Loss on obsolescence of inventories 34,000

Loss on discontinued operations 48,600

Administrative expense 73,400 780,800

Income before income tax 140,000

Income tax 56,000

Net income $84,000

Instructions

Indicate the deficiencies in the income statement presented above. Assume that the corporation desires a single-step income statement.

Step by step solution

01

Meaning of Income statement

The term income statement denotes an annual report prepared by the business entities to compute their net income or net loss earned by them during one accounting period. It contains the expenses and revenues of a company for the period they belong.

02

Deficiencies in the income statement

The following deficiencies are detected in the income statement:

• The formatting of the income statement is inappropriate as it should include the period for which theincome statementis being prepared.

• The gain on recovery of insurance proceeds must be disclosed separately under theextraordinary items section because the same is non-recurring.

• Thecost of goods soldmust be shown as the first expense, and then further expenses should be reported.

• The loss ofobsolescence of inventoriesis an unusual item; hence must be disclosed separately.

• Earnings per share are not reflected in the given income statement; hence outstanding common stock is required to determine the same.

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