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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

(Multiple-Step Statement with Retained Earnings Statement) Presented below is information related to Ivan Calderon Corp. for the year 2017.

Net sales $1,300,000 Write-off of inventory due to obsolescence 80,000

Cost of goods sold 780,000 Depreciation expense omitted by accident in 2016 55,000

Selling expenses 65,000 Casualty loss 50,000

Administrative expenses 48,000 Cash dividends declared 45,000

Dividend revenue 20,000 Retained earnings at December 31, 2016 980,000

Interest Revenue 7,000

Effective tax rate of 34% on all items

Instructions

  1. Prepare a multiple-step income statement for 2017. Assume that 60,000 shares of common stock are outstanding for the entire year.
  2. Prepare a separate retained earnings statement for 2017.

When does tax allocation within a period become necessary? How should this allocation be handled?

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?

The following information was taken from the records of Roland Carlson Inc. for the year 2017: income tax applicable to income from continuing operations \(187,000, income tax applicable to loss on discontinued operations \)25,500, and unrealized holding gain on available-for-sale securities (net of tax) \(15,000.

Gain on sale of equipment \)95,000 Cash dividends declared $150,000

Loss on discontinued operations75,000 Retained earnings January1,2017 600,000

Administrative expenses 240,000 Cost of goods sold 850,000

Rent revenue 40,000 Selling expenses 300,000

Loss on write-down of inventory 60,000 Sales revenue 1,900,000

Shares outstanding during 2017 were 100,000.

Instructions

  1. Prepare a single-step income statement.
  2. Prepare a comprehensive income statement for 2017 using the two statement format.
  3. Prepare a retained earnings statement for 2017.

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?
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