Ahold will report the "settlement of securities class action" loss in the other income and expenses section of its income statement. A loss on discontinued activities is recognized after tax in the income statement between income from continuing activities and the net result. Profit from the sale of equipment is shown under other income and expenses in the income statement. a) Impairment of fixed assets as a result of impairment must be shown as another income and expense item.
The delivery cost of goods sold must appear as a cost of sales in the income statement. If the amount is material, it must be shown in the statement of retained earnings as an adjustment to the opening balance of retained earnings. This must be reported in the income statement because it relates to the company's usual business operations. one).
It is shown net of tax after the income line from continuing operations on the income statement. The principal items reported in the statement of retained earnings are: (1) opening balance adjustments for corrections of errors or changes in accounting principle, (2) net income or loss for the period, (3) dividends for the year, and (4) ) limitations (divisions) of retained earnings.
Income from operations 2. Income before income tax
Income from operations BRIEF EXERCISE 4-7
SOLUTIONS TO EXERCISES
- 10–15 minutes)
- 15–20 minutes) Computation of net income
- Continued) Change in equity accounted
- 25–35 minutes) (a) Total net revenue
- Continued) (c) Dividends declared
- 20–25 minutes)
- Continued) Determination of amounts
- 20–25 minutes)
- 30–35 minutes)
- 30–40 minutes)
- Continued)
- 15–20 minutes)
- 30–35 minutes)
- Continued)
- 20–25 minutes)
- Continued)
- 20–25 minutes)
- Continued) (c) Selling expenses
- 20–25 minutes)
- 15–20 minutes)
- 15–20 minutes)
- 15–20 minutes)
- 15–20 minutes)
- 30–35 minutes)
- Continued)
- 10–15 minutes)
A limitation does not affect total retained earnings; it merely designates a portion of the retained earnings as being unavailable for dividend distribution.
TIME AND PURPOSE OF PROBLEMS
SOLUTIONS TO PROBLEMS
- Continued) Earnings per share
- Continued)
- Continued)
- Continued) Administrative Expenses
- Continued)
- The adjustment required for correction of an error is inappropriately labeled and also should not be reported in the retained earnings
- Earnings per share should be reported on the face of the income statement and not in the notes to the financial statements. Because
- Refund on litigation with government—body of income statement
- Loss on discontinued operations—body of the income statement, following the caption, “Income from continuing operations.”
- Continued)
748,500 Note: No adjustment is needed for the inventory method change, as the new method is reported in 2010 income. The cumulative effect on previous years retroactively of the new inventory method will be recorded in retained earnings. This charge is shown above income before tax and will not be reported after tax.
This item should be disclosed separately to inform users of the financial statements that this item is non-recurring and therefore may not affect the next year's results. Furthermore, trend comparisons can be misleading if such an item is not highlighted and adjustments made. A loss on the sale of equipment should be reported in the second income and expense section of the income statement.
The reason for the separate disclosure is much the same as that given above for the separate disclosure of the impairment of intangible goods charge. The adjustment required for the correction of an error is marked inappropriately and should not be marked in the retained earnings nor should it be reported in the statement of retained earnings. Changes in estimate must be handled by the income statement in current and future periods.
It would be extremely expensive to adjust accounts every time there was a change in estimate. In addition, it is inappropriate to adjust the opening balance of retained earnings, as the increased tax in this case affects current and future income statements. Earnings per share must be reported on the face of the income statement and not in the notes to the financial statements.
Because so much importance is attached to this statistic, the profession believes that the earnings per share figure should be highlighted. Loss from discontinued operations—the body of the income statement that follows the heading "Income from continuing operations." which follows the caption "Income from current operations". The write-off must be shown under other income, and the expenses from the income must be shown under other income and expenses in the income statement.
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
SOLUTIONS TO CONCEPTS FOR ANALYSIS
Continued)
Events of this type are a general risk assumed by any company and should not require special treatment. Sales taxes were mistakenly included in both gross sales and cost of goods sold on Walters Corporation's income statement. Failure to deduct these taxes directly from customer invoices results in a misleading inflation of the sales amount.
These taxes must be deducted from gross sales because the corporation acts as an agent to collect and pay such taxes to the government. Purchase discounts should not be treated as income by putting together other income such as dividends and interest. A purchase discount is more logically a reduction of the cost of purchases because revenue is not created by buying goods and paying for them.
However, in a credit transaction, costs are determined by the amount of cash required to immediately settle the obligation incurred. The discount should reduce the cost of goods sold to the amount of cash that would be required to immediately settle the obligation. These collections must be credited to the allowance for doubtful accounts unless the direct write-off method has been used in accounting for the doubtful accounts.
Although freight-out is an expense of sale and therefore properly reported in the statement, freight-in is an inventoriable cost and should have been included in the calculation of cost of goods sold. The value assigned to inventory should represent the value of the economic resources given up to acquire goods and prepare them for sale. This type of loss, although often substantial, should not be treated as an unusual item because it is apparently typical of the usual business activity of the corporation (and it is not a discontinued component).
This item must be reported as a separate component of the profit from continuing operations and not as an unusual item.
Continued)
FINANCIAL REPORTING PROBLEM
COMPARATIVE ANALYSIS CASE
FINANCIAL STATEMENT ANALYSIS CASE 1
Score Analysis
Note to instructors - in addition, students may be asked to perform analysis on companies that are in financial distress to examine whether their financial distress could have been predicted in advance.
FINANCIAL STATEMENT ANALYSIS CASE 2
INTERNATIONAL REPORTING CASE
Terminology—Finance costs are referred to as interest expense by Campbell and income is replaced with earnings
Campbell does not report either gross profit or income from opera- tions in its Statement of Earnings. These items would be reported
Campbell classifies separately non-operations items (finance revenues and costs and discontinued operations
Campbell reports EPS information on the face of the income statement
ACCOUNTING, ANALYSIS, PRINCIPLES
For example, by separating operational transactions from non-operational transactions, the user of the statement can distinguish between items with different implications for future business results. In addition, the itemized form generally combines costs and expenses with related revenues (eg, cost of goods sold with sales to arrive at a measure of gross profit). Finally, the detailed format highlights some of the intermediate components of income that analysts use to calculate ratios to evaluate a company's performance.
PROFESSIONAL RESEARCH
PROFESSIONAL SIMULATION
