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Chapter 4: Q35Q (page 181)

Question: What is meant by the terms elements and items as they relate to the income statement? Why might items have to be disclosed in the income statement?

Short Answer

Expert verified

Elements refer to the essential ingredients of the income statement, which include revenues, losses, gains, and expenses. At the same time, such components are disclosed in the income statement to predict the business's future.

Step by step solution

01

Step 1:Income statement

An income statement refers to a report that contains the description of a business entity’s revenues and expenses associated with one accounting period.

02

Step 2:Elements and items related to the income statement

The following major categories are reported in the income statement:

  • Revenues:Revenues are the gross receipts generated by a business concern through itsoperational activities.

  • Losses:Losses denote theexcess of expenses incurred by a business than revenue generation.

  • Gains:Gains refer to the revenues generated from unusual ornon-operational activities of the company.

Expenses: Expenses are the cost incurred by a business entity to generate revenues.

03

Importance of disclosing such elements and items

An income statement contains the elements mentioned above to determine the net loss or net income generated by a business from itsoperating and non-operating activities.

It also facilitates the stakeholders in predicting the company's future and forecasting future profits.

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Most popular questions from this chapter

Which of the following statements is correct regarding income reporting under IFRS?

(a) IFRS does not permit revaluation of property, plant, equipment, and intangible assets.

(b) IFRS provides the same options for reporting comprehensive income as GAAP.

(c) Companies must classify expenses by nature.

(d) IFRS provides a definition for all items presented in the income statement.

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?

Indicate where the following items would ordinarily appear on the financial statements of Boleyn, Inc. for the year 2017.

(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 would have been charged.

(b) In 2017, a flood destroyed a warehouse that had a book value of \)1,600,000. Floods are rare in this locality.

(c) In 2017, the company wrote off $1,000,000 of inventory that was considered obsolete.

(d) In 2014, a supply warehouse with an expected useful life of 7 years was erroneously expensed.

(e) Boleyn, Inc. changed from weighted-average to FIFO inventory pricing.

The following information was taken from the records of Roland Carlson Inc. for the year 2017: income tax applicable to income from continuing operations \(187,000, income tax applicable to loss on discontinued operations \)25,500, and unrealized holding gain on available-for-sale securities (net of tax) \(15,000.

Gain on sale of equipment \)95,000 Cash dividends declared $150,000

Loss on discontinued operations75,000 Retained earnings January1,2017 600,000

Administrative expenses 240,000 Cost of goods sold 850,000

Rent revenue 40,000 Selling expenses 300,000

Loss on write-down of inventory 60,000 Sales revenue 1,900,000

Shares outstanding during 2017 were 100,000.

Instructions

  1. Prepare a single-step income statement.
  2. Prepare a comprehensive income statement for 2017 using the two statement format.
  3. Prepare a retained earnings statement for 2017.

Bradshaw Company experienced a loss that was deemed to be both unusual in nature and infrequent in occurrence. How should Bradshaw report this item in accordance with IFRS?
See all solutions

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