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Chapter 4: 7 (page 179)
How can earnings management affect the quality of earnings?
The quality of earnings is negatively affected by earnings management. Earnings management lowers the reliability element of income.
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Linus Paper Company decided to close two small pulp mills in Conway, New Hampshire, and Corvallis, Oregon. These two closings do not represent a major shift in strategy for the company. Would these closings be reported in a separate section entitled “Discontinued operations after income from continuing operations”? Discuss.
Question: What are the two ways that other comprehensive income may be displayed (reported)?
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.
Question: Presented below is a combined single-step income and retained earnings statement for Nerwin Company for 2017.
(000 omitted)
Net sales revenue \(640,000
Costs and expenses
Cost of goods sold \)500,000
Selling, general, and administrative expenses 66,000
Other, net 17,000
583,000
Income before income tax 57,000
Income tax 19,400
Net income 37,600
Retained earnings at beginning of period, as previously reported 141,000
Adjustment required for correction of error (7,000)
Retained earnings at beginning of period, as restated 134,000
Dividends on common stock (12,200)
Retained earnings at end of period \(159,400
Additional facts are as follows.
1. “Selling, general, and administrative expenses” for 2017 included a charge of \)8,500,000 that was usual but infrequently occurring.
2. “Other, net” for 2017 included a loss on sale of equipment of $6,000,000.
3. “Adjustment required for correction of an error” was a result of a change in estimate (useful life of certain assets reduced to 8 years and a catch-up adjustment made).
4. Nerwin Company disclosed earnings per common share for net income in the notes to the financial statements.
Instructions
Determine from these additional facts whether the presentation of the facts in the Nerwin Company income and retained earnings statement is appropriate. If the presentation is not appropriate, describe the appropriate presentation and discuss its theoretical rationale. (Do not prepare a revised statement.)
Neumann Company computed earnings per share as follows.
Net income
_____________________________________
Common shares outstanding at year-end
Neumann has a simple capital structure. What possible errors might the company have made in the computation? Explain.
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