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. The 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’ 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.

Step by step solution

01

Meaning of Financial Statements

Financial statements refer to the reports containing one accounting period's financial information. Such reports reflect the summarized view of annual accounting information bifurcated in income statements, balance sheets, and cash flow statements.

02

Preparation of single-step income statement

Counting Crows Inc.
Income Statement
For the year ended December 31, 2017
Particulars	Amounts ($)
Sales revenue	1,900,000
Less: Cost of goods sold	(850,000)
Gross profit	1,050,000
Less: Selling expenses	(300,000)
Less: Administrative expenses	(240,000)
Income before other items	510,000
Other income and expenses
Rent revenue	102,700
Income before taxes	612,700
Income tax	(187,000)
Income from continuing operations	425,700
Discontinued operations
Loss on discontinued operations 110,000
Less: Applicable income tax reduction (60,500)	(49,500)
Net income	376,200
Earnings per share
Income from continuing operations (425,700/100,000)	4.26
Loss on discontinued operations, net of tax (49,500/100,000)	(0.50)
Net income (376,200/100,000)	3.76

03

Preparation of retained earnings statement

Counting Crows Inc.
Statement of Retained Earnings
For the year ended December 31, 2017
Particulars	Amounts ($)
Retained earnings, January 1, 2017	600,000
Add: Net income	376,200
Less: Cash dividend declared	(80,000)
Retained earnings, December 31, 2017	896,200

04

Preparation of comprehensive income statement

Counting Crows Inc.
Statement of Comprehensive Income
For the year ended December 31, 2017
Particulars	Amounts ($)
Net income	376,200
Other comprehensive income
Unrealized holding gain on available-for-sale securities	17,000
Less: Applicable taxes	(2,000)
Comprehensive income	391,200

05

The usefulness of a multi-step income statement

The multi-step income statement provides a detailed description of the operational and non-operational elements of the income statement. It facilitates the users to make effective and efficient decisions from the financial information.

The separation of accounting information in the income statement enables the analyststo compute various ratios for assessing a company’s performance.

06

Conceptual framework involved

The pro forma reporting is not consistent with the qualitative characteristic of accounting information associated with comparability. If Counting Crows Inc. classifies some financial elements in a pro forma manner and the same practice is not adopted by other companies, users of financial informationwill not be able to compare the data.

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