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Chapter 4: Question 4 (page 179)

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

Short Answer

Expert verified

The changes made by the business entity in its inventory valuation methods and depreciation methods lead to difficulties in the comparison process.

Step by step solution

01

Accounting Methods

Accounting methods are the procedures and rules used to report theexpenses and revenues followed by a company. Cash and Accrual accounting are the two main methods of accounting.

02

Different accounting methods leading to difficulties

Identification of two situations:

  • Changes in inventory methods: Changes in inventory methods such as LIFO to FIFO make the comparison complicated because both methods provide distinct outcomes.
  • Changes in depreciation methods: Each depreciationmethod provides different results. Hence, changing depreciation computation from the straight line to the diminishing value method may lead to difficulty in comparing companies.

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Most popular questions from this chapter

Distinguish between the modified all-inclusive income statement and the current operating performance income statement. According to present generally accepted accounting principles, which is recommended? Explain.

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.

What kinds of questions about future cash flows do investors and creditors attempt to answer with information in the income statement?

What is the basis for distinguishing between operating and non operating items?

Finley Corporation had income from continuing operations of \(10,600,000 in 2017. During 2017, it disposed of its restaurant division at an after-tax loss of \)189,000. Prior to disposal, the division operated at a loss of $315,000 (net of tax) in 2017 (assume that the disposal of the restaurant division meets the criteria for recognition as a discontinued operation). Finley had 10,000,000 shares of common stock outstanding during 2017. Prepare a partial income statement for Finley beginning with income from continuing operations.

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