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Chapter 4: Question 8 (page 179)

Why should caution be exercised in the use of the net income figure derived in an income statement? What are the objectives of generally accepted accounting principles in their application to the income statement?

Short Answer

Expert verified

There are many assumptions and estimations made in the accounting, and income is reported according to these assumptions. The objectives of generally accepted accounting principles are to report the results of operations.

Step by step solution

01

Generally Accepted Accounting Principles

Generally Accepted Accounting Principles are the set of basic guidelines and rules issued by the Financial Accounting Standards Board to improve the quality of financial statements.

02

Importance of exercising caution

Exercising caution is required because various assumptions are followed in the accounting process,and outcomes such as net income represent those considerations.

If suchassumptionsare not appropriately applied, it may provide inaccurate results.

03

Objectives of GAAP

The objectives of GAAP linked with the income statement are as follows:

  • The primary objective of the GAAP is to ensure that thetransactions belonging to a specific period should be reported in the same period.
  • The application of GAAP also ensures that no artificial information should be recorded in the books.

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Most popular questions from this chapter

The following account balances were included in the trial balance of Twain Corporation at June 30, 2017.

Sales revenue \(1,578,500

Depreciation expense (office furniture and equipment) \)7,250

Sales discounts \(31,150

Cost of goods sold \)896,770

Property tax expense \(7,320

Salaries and wages expense (sales) \)56,260

Bad debt expense (selling) \(4,850

Sales commissions \)97,600

Maintenance and repairs expense (administration) \(9,130

Travel expense (salespersons) \)28,930

Delivery expense \(21,400

Office expense \)6,000

Entertainment expense \(14,820

Sales returns and allowances \)62,300

Telephone and Internet expense (sales) \(9,030

Dividends received \)38,000

Depreciation expense (sales equipment) \(4,980

Interest expense \)18,000

Maintenance and repairs expense (sales) \(6,200

Income tax expense \)102,000

Miscellaneous selling expenses \(4,715

Depreciation understatement due to error鈥�2014 (net of tax) \)17,700

Office supplies used \(3,450

Telephone and Internet expense (administration) \)2,820

Dividends declared on preferred stock \(9,000

Dividends declared on common stock \)37,000

The Retained Earnings account had a balance of $337,000 at July 1, 2016. There are 80,000 shares of common stock outstanding.

Instructions

(a) Using the multiple-step form, prepare an income statement and a retained earnings statement for the year ended June 30, 2017.

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

(a) Loss on discontinued operations.

(b) Non-controlling interest allocation.

(c) Earnings per share.

(d) Gain on sale of equipment.

How can information based on past transactions be used to predict future cash flows?

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.

How can information based on past transactions be used to predict future cash flows?
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