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Chapter 4: Q5IFRS (page 198)

The income statement for a British company, Avon Rubber plc, is presented on the next page. Avon prepares its financial statements in accordance with IFRS.

Instructions

(a) Review the Avon Rubber income statement and identify at least three differences between the IFRS income statement and an income statement of a U.S. company as presented in the chapter.

(b) Identify any irregular items reported by Avon Rubber. Is the reporting of these irregular items in Avon’s income statement similar to reporting of these items in U.S. companies’ income statements? Explain.

Short Answer

Expert verified

The income statement prepared under IFRS and US Companies contains a variety of differences, such as reporting of earnings per share and extraordinary, exceptional, and non-operating items.

Step by step solution

01

Meaning of Financial Statements

Financial statements are the report card of the business entities prepared by the administration after the fixed intervals to review the economic health and performance of the company and communicate the results to the concerned stakeholders.

02

Differences

· The income statement prepared under the IFRS does not include the extraordinary items, while an income statement of a U.S. company considers the reporting of the same.

· The U.S. companies report extraordinary items such as unrealized revenues, expenses, losses, and gains in the income statement; in contrast, IFRS reports such events separately.

· The IFRS income statement reflects both earnings per share, basic and diluted. On the other hand, U.S. Companies report only basic earnings per share in their income statement.

03

Identification of irregular items

Avon Rubber's income statement reports some exceptional items, such as finance income, finance cost, and other finance income, are reported. The reporting of such items is not similar to the other U.S. Companies' income statements because such items are considered non-operational events in U.S. Companies' income statements and reported as extraordinary items.

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Most popular questions from this chapter

Question: Which of the following is not an acceptable way of displaying the components of other comprehensive income under IFRS?

(a) Within the statement of retained earnings.

(b) Second income statement.

(c) Combined statement of comprehensive income.

(d) All of these choices are acceptable.

Perlman Land Development, Inc. purchased land for \(70,000 and spent \)30,000 developing it. It then sold the land for \(160,000. Sheehan Manufacturing purchased land for a future plant site for \)100,000. Due to a change in plans, Sheehan later sold the land for \(160,000. Should these two companies report the land sales, both at gains of \)60,000, in a similar manner?

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.)

How can information based on past transactions be used to predict future cash flows?

The following financial statement was prepared by employees of Walters Corporation.

WALTERS CORPORATION

INCOME STATEMENT

THE YEAR ENDED DECEMBER 31, 2017

Revenues

Gross sales, including sales taxes \(1,044,300

Less: Returns, allowances, and cash discounts 56,200

Net sales 988,100

Dividends, interest, and purchase discounts 30,250

Recoveries of accounts written off in prior years 13,850

Total revenues 1,032,200

Costs and expenses

Cost of goods sold, including sales taxes 465,900

Salaries and related payroll expenses 60,500

Rent 19,100

Delivery expense and freight in 3,400

Bad debt expense 27,800

Total costs and expenses 576,700

Income before other items 455,500

Other items

Loss on discontinued styles (Note 1) 71,500

Loss on sale of marketable securities (Note 2) 39,050

Loss on sale of warehouse (Note 3) 86,350

Total other items 196,900

Net income \)258,600

Net income per share of common stock \(2.30

Note 1: New styles and rapidly changing consumer preferences resulted in a \)71,500 loss on the disposal of discontinued styles and related accessories.

Note 2: The Corporation sold an investment in marketable securities at a loss of \(39,050. The corporation normally sells securities of this nature.

Note 3: The Corporation sold one of its warehouses at an \)86,350 loss.

Instructions

Identify and discuss the weaknesses in classification and disclosure in the single-step income statement above. You should explain why these treatments are weaknesses and what the proper presentation of the items would be in accordance with GAAP.
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