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### Intermediate Accounting (Kieso)

Book edition 16th
Author(s) Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
Pages 1552 pages
ISBN 9781118743201

# Question: Presented below is a combined single-step income and retained earnings statement for Nerwin Company for 2017. (000 omitted) Net sales revenue $640,000 Costs and expenses Cost of goods sold$500,000 Selling, general, and administrative expenses 66,000 Other, net 17,000 583,000 Income before income tax 57,000 Income tax 19,400 Net income 37,600Retained earnings at beginning of period, as previously reported 141,000 Adjustment required for correction of error (7,000) Retained earnings at beginning of period, as restated 134,000 Dividends on common stock (12,200)Retained earnings at end of period $159,400 Additional facts are as follows. 1. “Selling, general, and administrative expenses” for 2017 included a charge of$8,500,000 that was usual but infrequently occurring. 2. “Other, net” for 2017 included a loss on sale of equipment of $6,000,000. 3. “Adjustment required for correction of an error” was a result of a change in estimate (useful life of certain assets reduced to 8 years and a catch-up adjustment made). 4. Nerwin Company disclosed earnings per common share for net income in the notes to the financial statements. Instructions Determine from these additional facts whether the presentation of the facts in the Nerwin Company income and retained earnings statement is appropriate. If the presentation is not appropriate, describe the appropriate presentation and discuss its theoretical rationale. (Do not prepare a revised statement.) As per the given scenario, the Nerwin Company requires some modifications in its presentation to reflect the data accurately. Also, accurate presentation facilitates the users to draw effective financial decisions. See the step by step solution ### Step by Step Solution ## Step 1: Meaning of Financial Reporting Financial reporting refers to the process of disclosing the financial data of a business concern with its associated stakeholders. The companies use financial statements to report their information to interested parties. ## Step 2: Requirements for appropriate presentation 1. The selling and administration expenses include a charge of$8,500,000 that was usual but infrequently occurring. The same should be reported as an extraordinary item because such an event is non-recurring.

2. Loss on sale of equipment is the non-recurring activity of the business entity; hence the same should be disclosed separately under extraordinary items. Also, the remaining balance, i.e., $11,000,000, should be considered as other expenses, and a respective loss of$6,000,000 should be reported as an extraordinary item.

3. The error correction treatment is correct because the same should be adjusted in the opening balance of the profit and loss account.

4. The Nerwin Company should disclose the earnings per share below the net income in the income statement after deducting the preferred dividend from the net income.