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Chapter 4: Problem 17

Indicate the section of a multiple-step income statement in which each of the following is shown. (a) Loss on inventory write-down. (b) Loss from strike. (c) Bad debt expense. (d) Loss on disposal of a component of the business. (e) Gain on sale of machinery. (f) Interest revenue. (g) Depreciation expense. (h) Material write-offs of notes receivable.

Short Answer

Expert verified
(a) Operating Expenses; (b) Other Expenses; (c) Operating Expenses; (d) Discontinued Operations; (e) Other Revenues; (f) Other Revenues; (g) Operating Expenses; (h) Other Expenses.

Step by step solution

01

Understanding Sections of a Multiple-Step Income Statement

A multiple-step income statement separates operating revenues and expenses from non-operating items and gains or losses outside regular business operations. The key sections include: Operating Section (Operating Revenues and Expenses), Non-Operating Section (Other Revenues and Expenses), and Discontinued Operations.
02

Loss on Inventory Write-down

Loss on inventory write-down is charged when inventory's market value falls below its cost. This type of loss is classified under 'Operating Expenses' as it is related to core business activities.
03

Loss from Strike

Loss from a strike is a non-recurring event that affects the business operations but is not a regular operational expense. It is shown under 'Other Expenses' in the Non-Operating Section of the income statement.
04

Bad Debt Expense

Bad debt expense occurs when a business recognizes that some of its receivables will not be collected. It is included in the 'Operating Expenses' section, as it is considered a regular cost of doing business.
05

Loss on Disposal of a Component of the Business

This loss is related to the disposal of a major component and is reported in the 'Discontinued Operations' section of the multiple-step income statement, separately from regular business activities.
06

Gain on Sale of Machinery

The gain on the sale of machinery is an incidental some-time event and is recorded under 'Other Revenues' in the Non-Operating Section, as it is not directly related to regular business activities.
07

Interest Revenue

Interest revenue arises from interest earned on investments or savings and is recognized under 'Other Revenues' in the Non-Operating Section, as it is not part of main business operations.
08

Depreciation Expense

Depreciation expense accounts for the allocation of the cost of tangible assets over their useful lives. This is included in the 'Operating Expenses' section because it relates to assets used in daily business operations.
09

Material Write-offs of Notes Receivable

Material write-offs of notes receivable relate to significant noncollectable amounts and are considered 'Other Expenses' in the Non-Operating Section, distinct from regular operations.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Operating Expenses
In a multiple-step income statement, operating expenses are those expenses that relate directly to the company's core business activities. These are the costs incurred in the normal course of running the business and primarily involve day-to-day operations. Some common examples include:
  • Depreciation Expense: This is the systematic allocation of the cost of tangible assets like machinery and equipment over their useful lives. It's a regular non-cash expense that helps in matching the cost of assets with the revenue they generate.
  • Bad Debt Expense: This occurs when a company anticipates that some of its credit customers will not pay their dues. It is essential to account for these potential losses to provide a realistic picture of the financial health of the business.
  • Loss on Inventory Write-down: Occurs when the value of merchandise inventory falls below its original cost, forcing a loss recognition which is considered a normal operational cost.
Understanding these will help you see how regular business costs are distinguished from non-operational or irregular items in financial statements.
Non-Operating Section
The non-operating section of a multiple-step income statement separates costs or revenues that are not related to the company's primary operations. This helps in highlighting regular income from core activities. Here are some of the items found in this section:
  • Interest Revenue: Money earned from interest on investments or deposits. Since it is not derived from the business's main activity, it doesn't fall under operating revenues.
  • Gain on Sale of Machinery: This is considered an incidental gain because selling machinery isn鈥檛 part of the company's routine sales activities. Thus, it鈥檚 listed under other revenues.
  • Loss from Strike: Situations like strikes halting production are rare, so associated losses are categorized under non-operating expenses. This classification helps investors understand the unusual and less predictable impact on finances.
  • Material Write-offs of Notes Receivable: This is when significant amounts owed to the company become uncollectible. These are infrequent write-offs considered outside normal operations.
Identifying these items separately provides clarity on how they impact financial outcomes differently from regular operations.
Discontinued Operations
Discontinued operations refer to components of the business that have been sold, disposed of, or considered held for sale. These operations are reported separately on the income statement to provide a clearer view of ongoing business performance. The key aspects include:
  • Loss on Disposal of a Component: This involves the financial impact of disposing of a part of the business, such as a product line or geographical segment, that is no longer contributing to the company's core operations.
This distinct section helps stakeholders distinguish between the earnings from continuing operations and those from parts of the business that have been or will be divested. Considering that discontinued operations do not recur, this transparency assists in clearer forecasting and business evaluation.

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Most popular questions from this chapter

State some of the more serious problems encountered in seeking to achieve the ideal measurement of periodic net income. Explain what accountants do as a practical alternative.

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?

On January \(30,2009,\) a suit was filed against Frazier Corporation under the Environmental Protection Act. On August \(6,2010,\) Frazier Corporation agreed to settle the action and pay \(\$ 920,000\) in damages to certain current and former employees. How should this settlement be reported in the 2010 financial statements? Discuss.

Discuss the appropriate treatment in the financial statements of each of the following. (a) An amount of 113,000 dollars realized in excess of the cash surrender value of an insurance policy on the life of one of the founders of the company who died during the year. (b) A profit-sharing bonus to employees computed as a percentage of net income.(c) Additional depreciation on factory machinery because of an error in computing depreciation for the previous year. (d) Rent received from subletting a portion of the office space. (e) A patent infringement suit, brought 2 years ago against the company by another company, was settled this year by a cash payment of \(\$ 725,000\) (f) A reduction in the Allowance for Doubtful Accounts balance, because the account appears to be considerably in excess of the probable loss from uncollectible receivables.

Indicate where the following items would ordinarily appear on the financial statements of Boleyn, Inc. for the year 2010 . (a) The service life of certain equipment was changed from 8 to 5 years. If a 5 -year life had been used previously, additional depreciation of 425,000 dollars would have been charged. (b) In 2010 a flood destroyed a warehouse that had a book value of 1,600,000 dollars. Floods are rare in this locality. (c) In 2010 the company wrote off \(\$ 1,000,000\) of inventory that was considered obsolete.(d) An income tax refund related to the 2007 tax year was received. (e) In 2007 , a supply warehouse with an expected useful life of 7 years was erroneously expensed. (f) Boleyn, Inc. changed from weighted-average to FIFO inventory pricing.
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