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Chapter 4: Question 19 (page 180)

You run into Greg Norman at a party and begin discussing financial statements. Greg says, 鈥淚 prefer the single step income statement because the multiple-step format generally overstates income.鈥� How should you respond to Greg?

Short Answer

Expert verified

Both the formats of income statement multi-step and single-step report the same net income.

Step by step solution

01

Financial Statements

Financial statements are the annual reports of a business concern containing the summarized information of one year鈥檚 financial information.

02

Explanation to Greg

According to the given scenario, the concerned person should be provided with the proper explanation of the two different formats of theincome statement.

The amount of net income remains the same in both cases; the only difference is that a multi-step income statement reports the revenues and expenses in a bifurcated form, such as operational and non-operational.

On the other hand, the single-step income statement presents the revenues and expenses in an aggregated way.

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Most popular questions from this chapter

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

Discuss the appropriate treatment in the income statement for the following items:

(a) Loss on discontinued operations.

(b) Non-controlling interest allocation.

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.

What is earnings management?

Identify at least two situations in which application of different accounting methods or accounting estimates results in difficulties in comparing companies.
See all solutions

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