Financial Reports: Statement of Income, Compre- Compre-hensive Income and Changes in Equity
LO 6: Identify and describe the types of analysis techniques that can be used for income and equity statements
Analysis of the financial statements is critical to decision making and to properly assess the overall financial health of a company. Analysis transforms the data into meaningful information for management, investors, creditors, and other company stakeholders. By evaluating the financial data, trends can be identified which can be used to predict the company’s future performance. Some techniques used on financial statements include horizontal analysis that compares data from multiple years, vertical analysis that expresses certain subtotals (gross profit) as a percentage of a total amount (sales), and ratio analysis that highlights important relationships between data.
References
CPA Canada. (2011). CPA Canada handbook, Part I, IAS 8.
Jones, J. (2014, September 19). Restated Penn West results reveal cut to cash flow. The Globe and Mail. Retrieved fromhttps://secure.globeadvisor.com/servlet/ArticleNew s/story/gam/20140919/RBCDPENNWESTFINAL
Exercises
EXERCISE 3–1
The following information pertains to Inglewood Ltd. for the 2020 fiscal year ending December 31:
Gain on sale of FVNI investments (before tax): $ 1,500 Loss from operation of discontinued division (net of tax) 2,500 Loss from disposal of discontinued division (net of tax) 3,500
Income from operations (before tax) 125,000
Unrealized holding gain of FVOCI investments (net of tax) 12,000
The company tax rate is 27%. The unrealized holding gain is from FVOCI investments where the gain has been recorded to other comprehensive income (OCI).
Required:
a. Calculate income from continuing operations, net income, other comprehensive income, and total comprehensive income.
b. How would your answers change in part (a) if the company followed ASPE?
EXERCISE 3–2
Wozzie Wiggits Ltd. produces and sells gaming software. In 2020, Wozzie’s net income exceeded analysts’ expectations in the stock markets by 8%, suggesting an 8% increase from operations. Included in net income was a significant gain on sale of some unused assets. The company also changed their inventory pricing policy from FIFO which is currently being used in their industry sector to weighted average cost, causing a significant drop in cost of goods sold. This policy change was fully disclosed in the notes to the financial statements.
Required: Based solely on the information above, do you think that Wozzie’s earnings are of high quality? Would you be willing to invest in this company based on the quality of earnings noted in the question?
EXERCISE 3–3
Eastern Cycles Ltd. is a franchise that sells bicycles and cycling equipment to the public. It currently operates several corporate-owned retail stores in Ottawa that are not considered a separate major line of business. It also has several franchised stores in Alberta. The franchisees buy all of their products from Eastern Cycles and pay 5% of their monthly sales revenues to Eastern Cycles in return for corporate sponsored advertising, training, and sup-port. Eastern Cycles continues to monitor each franchise to ensure quality customer service.
In 2020, Eastern Cycles sold its corporate owned stores in Ottawa to a franchisee.
Exercises 67
Required: Would the sale of the franchise meet the classification of a discontinued operation under IFRS or ASPE?
EXERCISE 3–4
For the year ended December 31, 2020, Bunsheim Ltd. reported the following: sales rev-enue $680,000; cost of sales $425,750; operating expenses $75,000; and unrealized gain on Available-for-sale investments $25,000 (net of related tax of $5,000). The company had balances as at January 1, 2020, as follows: common shares $480,000; accumulated other comprehensive income $177,000; and retained earnings $50,000. The company did not issue any common shares during 2020. On December 15, 2020, the board of directors declared a $45,000 dividend to its common shareholders payable on January 31, 2021. The company accounts for its investments in accordance with IFRS 9 meaning that any unrealized gains/losses on FVOCI investments are to be reported as other comprehensive income (OCI).
On January 4, 2021, the company discovered that there was an understatement in travel expenses from 2019 of $80,000. The books for 2019 are closed.
Required
a. Prepare a statement of changes in equity including required disclosures. The enacted tax rate is 27% and has not changed for several years.
b. Prepare the same statement as in part (a) assuming that Bunsheim Ltd. follows ASPE.
EXERCISE 3–5
For the year ended December 31, 2020, Patsy Inc. had income from continuing operations of $1,500,000. During 2020, it disposed of its Calgary division at a loss before taxes of
$125,000. Before the disposal, the division operated at a before-tax loss of $150,000 in 2019 and $175,000 in 2020. Patsy also had an unrealized gain in its Availablefor-sale investments (FVOCI) of $27,500 (net of tax). It accounts for its investments in accordance with IFRS 9.
Patsy had 50,000 outstanding common shares for the entire 2020 fiscal year and its income tax rate is 30%.
Required:
a. Prepare a partial statement of comprehensive income with proper disclosures for Patsy Inc. beginning with income from continuing operations. Patsy follows IFRS.
b. How would the statement in part (a) differ if Patsy followed ASPE?
EXERCISE 3–6
Below are the changes in account balances, except for retained earnings, for Desert Dorm Ltd., for the 2020 fiscal year:
Account increase (decrease)
Accounts payable $ (23,400)
Accounts receivable (net) 15,800
Bonds payable 46,500
Cash 41,670
Common shares 87,000
Contributed surplus 18,600
Inventory 218,400
Investments – FVNI (46,500)
Intangible assets – patents 14,000
Unearned revenue 45,200
Retained earnings ??
Required: Calculate the net income for 2020, assuming there were no entries in the retained earnings account except for net income and a dividend declaration of $44,000, which was paid in 2020. (Hint: using the accounting equation A= L + E to help solve this question)
EXERCISE 3–7
In 2020, Imogen Co. reported net income of $575,000, and declared and paid preferred share dividends of $75,000. During 2020, the company had a weighted average of 66,000 common shares outstanding.
Required: Calculate the company’s basic earnings per share.
EXERCISE 3–8
A list of selected accounts for Opi Co. is shown below. All accounts have normal balances.
The income tax rate is 30%.
Exercises 69
Opi Co.
For the year ended December 31, 2020
Accounts payable $ 63,700
Accounts receivable 136,500
Accumulated depreciation – building 25,480
Accumulated depreciation – equipment 36,400
Administrative expenses 128,700
Allowance for doubtful accounts 6,500
Bond payable 130,000
Buildings 127,400
Cash 284,180
Common shares 390,000
Cost of goods sold 1,020,500
Dividends 58,500
Equipment 182,000
Error correction for understated cost of goods sold from 2019 13,500
Freight-out 26,000
Gain on disposal of discontinued operations – South Division 27,560
Gain on sale of land 39,000
Inventory 161,200
Land 91,000
Miscellaneous operating expenses 1,560
Notes payable 91,000
Notes receivable 143,000
Rent revenue 23,400
Retained earnings 338,000
Salaries and wages payable 23,500
Sales discounts 18,850
Sales returns and allowances 22,750
Sales revenue 1,820,000
Selling expenses 561,600
Required:
a. Prepare a single-step income statement with expenses by function and a separate state-ment of retained earnings assuming that Opi is a private company that follows ASPE.
b. Prepare a combined single-step income statement and retained earnings by function assuming ASPE.
EXERCISE 3–9
Below are adjusted accounts and balances for Ace Retailing Ltd. for the year ended December 31, 2020:
Cost of goods sold 750,000
Dividends declared (common shares) 245,000
Dividends declared (preferred shares) 82,000 Gain on disposal of discontinued J division 115,000
Gain on sale of FVNI investments 45,000
Interest income 15,000
Loss on impairment of goodwill 12,000
Loss due to warehouse fire 175,000
Loss from operation of discontinued J division 285,000 Loss on disposal of unused equipment from F division 82,000
Retained earnings, January 1, 2020 458,000
Sales revenue 1,500,000
Selling and administrative expenses 245,000 Unrealized gain on FVOCI investments (OCI) 18,600
Additional information:
1. Ace decided to discontinue the J division operations. A formal plan to dispose of J division has been completed. There are no plans to dispose of F division at this time.
2. During 2020, 400,000 common shares were outstanding with no shares activity for 2020.
3. Ace’s tax rate is 27%.
4. Ace follows IFRS and accounts for its investments in accordance with IFRS 9 meaning that any unrealized gains/losses for FVNI are reported through net income and FVOCI are reported in OCI.
Required:
a. Prepare a multiple-step statement of income for the year ended December 31, 2020, in good form reporting expenses by function.
b. Prepare a combined statement of income and comprehensive income in good form reporting expenses by function.
c. How would the answer in part (b) differ if a statement of comprehensive income were to be prepared without combining it with the statement of income?
d. Prepare a single-step statement of income in good form reporting expenses by function.
e. Explain what types of items are to be reported in other revenue and expenses as part of continuing operations, and provide examples for a retail business.
Exercises 71
EXERCISE 3–10
Vivando Ltd. follows IFRS and reported income from continuing operations before income tax of $1,820,000 in 2020. The year-end is December 31, 2020, and the company had 225,000 outstanding common shares throughout the 2020 fiscal year. Additional transactions not considered in the $1,820,000 are listed below:
In 2020, Vivando sold equipment of $75,000. The equipment had originally cost $92,000 and had accumulated depreciation to date of $33,400. The gain or loss is considered ordinary.
The company discontinued operations of one of its subsidiaries, disposing of it during the current year at a total loss of $180,600 before tax. Assume that this transaction meets the criteria for discontinued operations. The loss on operation of the discontinued subsidiary was
$68,000 before tax. The loss from disposal of the subsidiary was $112,600 before tax.
The sum of $180,200 was received because of a lawsuit for a breached 2016 contract. Before the decision, legal counsel was uncertain about the outcome of the suit and had not estab-lished a receivable.
In 2020, the company reviewed its accounts receivable and determined that $125,600 of accounts receivable that had been carried for years appeared unlikely to be collected. No allowance for doubtful accounts was previously set up.
An internal audit discovered that amortization of intangible assets was understated by $22,800 (net of tax) in a prior period. The amount was charged against retained earnings.
Required: Analyze the above information and prepare an income statement for the year 2020, starting with income from continuing operations before income tax (Hint: refer to the Toulon Ltd. example in Section 4 of this chapter). Calculate earnings per share as it should be shown on the face of the income statement. Assume a total effective tax rate of 25% on all items, unless otherwise indicated.
EXERCISE 3–11
The following account balances were included in the adjusted trial balance of Spyder Inc. at September 30, 2020. All accounts have normal balances:
Accumulated depreciation, office furniture 25,000
Accumulated depreciation, sales equipment 80,000
Accumulated Other Comprehensive Income 162,000
Allowance for doubtful accounts 2,500
Cost of goods sold 1,500,478
Common shares 454,000
Depreciation expense, office furniture 10,150
Depreciation expense, sales equipment 6,972
Depreciation expense, understatement due to error – 2019 24,780
Dividend revenue 53,200
Dividends declared on common shares 12,600
Entertainment expense 20,748
Freight-out 40,502
Gain on sale of land 78,400
Interest expense 25,200
Loss on disposal of discontinued operations – Aphfflek Division 49,000 Miscellaneous operating expenses (administrative) 6,601
Retained earnings 215,600
Salaries and wages expense – office staff 78,764
Sales commissions expense 136,640
Sales discounts 21,000
Sales returns and allowances 87,220
Sales revenue 2,699,900
Supplies expenses (administrative) 4,830
Telephone and Internet expense (administrative) 3,948
Telephone and Internet expense (sales) 12,642
Additional information:
The company follows IFRS and its income tax rate is 30%. On September 30, 2020, the number of common shares outstanding was 124,000 and no changes to common shares during the fiscal year. The depreciation error was due to a missed month-end accrual entry at August 31, 2019.
Required:
a. Prepare a multiple-step income statement in good form with all required disclosures by function and by nature for the year ending September 30, 2020.
b. Prepare a statement of changes in equity in good form with all required disclosures for the year ended September 30, 2020.
c. Prepare a single-step income statement in good form with all required disclosures by nature for the year ending September 30, 2020, assuming this time that the dividends declared account listed in the trial balance are for preferred shares instead of common shares.
Exercises 73
d. Assuming that Spyder also recorded unrealized gains for FVOCI investments through OCI of $25,000, prepare a statement of comprehensive income for the company.