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Chapter 4: Question 4 (page 179)

Identify at least two situations in which application of different accounting methods or accounting estimates results in difficulties in comparing companies.

Short Answer

Expert verified

The changes made by the business entity in its inventory valuation methods and depreciation methods lead to difficulties in the comparison process.

Step by step solution

01

Accounting Methods

Accounting methods are the procedures and rules used to report theexpenses and revenues followed by a company. Cash and Accrual accounting are the two main methods of accounting.

02

Different accounting methods leading to difficulties

Identification of two situations:

  • Changes in inventory methods: Changes in inventory methods such as LIFO to FIFO make the comparison complicated because both methods provide distinct outcomes.
  • Changes in depreciation methods: Each depreciationmethod provides different results. Hence, changing depreciation computation from the straight line to the diminishing value method may lead to difficulty in comparing companies.

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Most popular questions from this chapter

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.

How can earnings management affect the quality of earnings?

(Multiple-Step and Single-Step Statements) The accountant of Latifa Shoe Co. has piled the following information from the company’s records as a basis for an income statement for the year ended December 31, 2017.

Rent revenue \(29,000

Interest expense 18,000

Market appreciation on land above cost 31,000

Salaries and wages expense (selling) 114,800

Supplies (selling) 17,600

Income tax 37,400

Salaries and wages expense (administrative) \)135,900

Other administrative expenses 51,700

Cost of goods sold 496,000

Net sales 980,000

Depreciation on plant assets (70% selling, 30% administrative) 65,000

Cash dividends declared 16,000

There were 20,000 shares of common stock outstanding during the year.

Instructions

  1. Prepare a multiple-step income statement.
  2. Prepare a single-step income statement.
  3. (c) Which format do you prefer? Discuss.

Portman Corporation has retained earnings of \(675,000 at January 1, 2017. Net income during 2017 was \)1,400,000, and cash dividends declared and paid during 2017 totaled $75,000. Prepare a retained earnings statement for the year ended December 31, 2017.

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.
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