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Chapter 4: Q1IFRS (page 198)

IFRS4-1 Explain the difference between the “nature-of-expense” and “function-of-expense” classifications.

Short Answer

Expert verified

Nature of expense method classifies expenses according to their nature based on the type of economic expenses incurred.

Function of expense method groups expenses depending upon the purpose for which these costs are incurred.

Step by step solution

01

Meaning of Expense

An expense refers to the cost of operations incurred for generating revenues. Employee wages, salaries, factory rent, utilities, and depreciation are some examples of expenses.

02

Explanation of differentiation between "nature of expense" and "function of expense" classification

The classification of expenses by nature is associated with different categories of what the expense is in itself, such as rent expense, employee benefits expense, amortization expense etc.

On the other hand, functional classification is done on the basis of purpose, such as the type of activity associated. Administrative expenses, selling and distribution expenses, and manufacturing expenses are some types of functional classification.

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Most popular questions from this chapter

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

Question: O’Malley Corporation was incorporated and began business on January 1, 2017. It has been successful and now requires a bank loan for additional working capital to finance expansion. The bank has requested an audited income statement for the year 2017. The accountant for O’Malley Corporation provides you with the following income statement which O’Malley plans to submit to the bank.

O’MALLEY CORPORATION

INCOME STATEMENT

Sales revenue \(850,000

Dividends 32,300

Gain on recovery of insurance proceeds from

earthquake loss 38,500

920,800

Less:

Selling expenses \)101,100

Cost of goods sold 510,000

Advertising expense 13,700

Loss on obsolescence of inventories 34,000

Loss on discontinued operations 48,600

Administrative expense 73,400 780,800

Income before income tax 140,000

Income tax 56,000

Net income $84,000

Instructions

Indicate the deficiencies in the income statement presented above. Assume that the corporation desires a single-step income statement.

You run into Greg Norman at a party and begin discussing financial statements. Greg says, “I prefer the single step income statement because the multiple-step format generally overstates income.” How should you respond to Greg?

The financial records of LeRoi Jones Inc. were destroyed by fire at the end of 2017. Fortunately, the controller had kept certain statistical data related to the income statement as follows.XXX

  1. The beginning merchandise inventory was \(92,000 and decreased 20% during the current year.
  2. Sales discounts amount to \)17,000.
  3. 20,000 shares of common stock were outstanding for the entire year.
  4. Interest expense was \(20,000.
  5. The income tax rate is 30%.
  6. The cost of goods sold amounts to \)500,000.
  7. Administrative expenses are 20% of the cost of goods sold but only 8% of gross sales.
  8. Four-fifths of the operating expenses relate to sales activities.

Instructions

From the foregoing information prepare an income statement for the year 2017 in single-step form.

Wade Corp. has 150,000 shares of common stock outstanding. In 2017, the company reports income from continuing operations before income tax of \(1,210,000. Additional transactions not considered in the \)1,210,000 are as follows.

1. In 2017, Wade Corp. sold equipment for \(40,000. The machine had originally cost \)80,000 and had accumulated depreciation of \(30,000. The gain or loss is considered non-recurring.

2. The company discontinued operations of one of its subsidiaries during the current year at a loss of \)190,000 before taxes. Assume that this transaction meets the criteria for discontinued operations. The loss from operations of the discontinued subsidiary was \(90,000 before taxes; the loss from disposal of the subsidiary was \)100,000 before taxes.

3. An internal audit discovered that amortization of intangible assets was understated by \(35,000 (net of tax) in a prior period. The amount was charged against retained earnings.

4. The company recorded a non-recurring gain of \)125,000 on the condemnation of some of its property (included in the $1,210,000).

Instructions

Analyze the above information and prepare an income statement for the year 2017, starting with income from continuing operations before income tax. Compute earnings per share as it should be shown on the face of the income statement. (Assume a total effective tax rate of 38% on all items, unless otherwise indicated.)
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