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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

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.

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

How can earnings management affect the quality of earnings?

(Multiple-Step Statement) The following balances were taken from the books of Alonzo Corp. on December 31, 2017.

Interest revenue \(86,000 Accumulated depreciation equipment \)40,000

Cash \(51,000 Accumulated depreciation鈥攂uildings \)28,000

Sales revenue \(1,380,000 Notes receivable \)155,000

Accounts receivable \(150,000 Selling expenses \)194,000

Prepaid insurance \(20,000 Accounts payable \)170,000

Sales returns and allowances \(150,000 Bonds payable \)100,000

Allowance for doubtful accounts \(7,000 Administrative and general expense \)97,000

Sales discounts \(45,000 Accrued liabilities \)32,000

Land \(100,000 Interest expense \)60,000

Equipment \(200,000 Notes payable \)100,000

Buildings \(140,000 Loss from earthquake damage \)150,000

Cost of goods sold \(621,000 Common stock \)500,000

Retained earnings $21,000

Assume the total effective tax rate on all items is 34%.

Instructions

Prepare a multiple-step income statement; 100,000 shares of common stock were outstanding during the year.

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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