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Chapter 4: Q1IFRS (page 198)

IFRS4-1 Explain the difference between the 鈥渘ature-of-expense鈥� and 鈥渇unction-of-expense鈥� classifications.

Short Answer

Expert verified

Nature of expense method classifies expenses according to their nature based on the type of economic expenses incurred.

Function of expense method groups expenses depending upon the purpose for which these costs are incurred.

Step by step solution

01

Meaning of Expense

An expense refers to the cost of operations incurred for generating revenues. Employee wages, salaries, factory rent, utilities, and depreciation are some examples of expenses.

02

Explanation of differentiation between "nature of expense" and "function of expense" classification

The classification of expenses by nature is associated with different categories of what the expense is in itself, such as rent expense, employee benefits expense, amortization expense etc.

On the other hand, functional classification is done on the basis of purpose, such as the type of activity associated. Administrative expenses, selling and distribution expenses, and manufacturing expenses are some types of functional classification.

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Most popular questions from this chapter

Which statement is correct regarding IFRS?

  1. An advantage of the nature-of-expense method is that it is simple to apply because allocations of expense to different functions are not necessary.
  2. The function-of-expense approach never requires arbitrary allocations.
  3. An advantage of the function-of-expense method is that the allocation of costs to the varying functions is rarely arbitrary.
  4. IFRS requires the use of the nature-of-expense approach.

Starr Co. had sales revenue of \(540,000 in 2017. Other items recorded during the year were:

Cost of goods sold \)330,000

Salaries and wages expense 120,000

Income tax expense 25,000

Increase in value of company reputation 15,000

Other operating expenses 10,000

Unrealized gain on value of patents 20,000

Prepare a single-step income statement for Starr for 2017. Starr has 100,000 shares of stock outstanding.

Wade Corp. has 150,000 shares of common stock outstanding. In 2017, the company reports income from continuing operations before income tax of \(1,210,000. Additional transactions not considered in the \)1,210,000 are as follows.

1. In 2017, Wade Corp. sold equipment for \(40,000. The machine had originally cost \)80,000 and had accumulated depreciation of \(30,000. The gain or loss is considered non-recurring.

2. The company discontinued operations of one of its subsidiaries during the current year at a loss of \)190,000 before taxes. Assume that this transaction meets the criteria for discontinued operations. The loss from operations of the discontinued subsidiary was \(90,000 before taxes; the loss from disposal of the subsidiary was \)100,000 before taxes.

3. An internal audit discovered that amortization of intangible assets was understated by \(35,000 (net of tax) in a prior period. The amount was charged against retained earnings.

4. The company recorded a non-recurring gain of \)125,000 on the condemnation of some of its property (included in the $1,210,000).

Instructions

Analyze the above information and prepare an income statement for the year 2017, starting with income from continuing operations before income tax. Compute earnings per share as it should be shown on the face of the income statement. (Assume a total effective tax rate of 38% on all items, unless otherwise indicated.)

The financial statements of P&G are presented in Appendix B. The company鈥檚 complete annual report, including the notes to the financial statements, is available online.

Instructions

Refer to P&G鈥檚 financial statements and the accompanying notes to answer the following questions.

(a) What type of income statement format does P&G use? Indicate why this format might be used to present income statement information.

(b) What are P&G鈥檚 primary revenue sources?

(c) Compute P&G鈥檚 gross profit for each of the years 2012鈥�2014. Explain why gross profit decreased in 2014.

(d) Why does P&G make a distinction between operating and nonoperating revenue?

(e) What financial ratios did P&G choose to report in its 鈥淔inancial Summary鈥� section covering the years 2009鈥�2014?

Question: What major types of items are reported in the retained earnings statement?
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