What kinds of questions about future cash flows do investors and creditors attempt to answer with information in the income statement?
An income statement facilitates the investors and creditors to predict future cash flows by comparing the current outcomes with previous reports.
An income statement refers to a report prepared by the business entities to ascertain their profits or losses from operating and non-operating functions.
An income statement contains the description of revenues and expenses of one accounting period. It helps the investors and creditors to determine the business’s ability to produce cash in the future.
In addition, it facilitates the investors and creditors to determine the level of risks associated with the business by evaluating and comparing the current and past performance.
The following financial statement was prepared by employees of Walters Corporation.
THE YEAR ENDED DECEMBER 31, 2017
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
Delivery expense and freight in 3,400
Bad debt expense 27,800
Total costs and expenses 576,700
Income before other items 455,500
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.
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.
Question: (Earnings per Share) The stockholders’ equity section of Hendly Corporation appears below as of December 31, 2017.
8% preferred stock, $50 par value, authorized
100,000 shares, outstanding 90,000 shares $4,500,000
Common stock, $1.00 par, authorized and issued 10 million shares 10,000,000
Additional paid-in capital 20,500,000
Retained earnings $134,000,000
Net income 33,000,000167,000,000
Net income for 2017 reflects a total effective tax rate of 34%. Included in the net income figure is a loss of $18,000,000 (before tax) as a result of a non-recurring major casualty. Preferred stock dividends of $360,000 were declared and paid in 2017. Dividends of $1,000,000 were declared and paid to common stockholders in 2017.
Compute earnings per share data as it should appear on the income statement of Hendly Corporation.
Question: As audit partner for Grupo and Rijo, you are in charge of reviewing the classification of unusual items that have occurred during the current year. The following material items have come to your attention.
1. A merchandising company incorrectly overstated its ending inventory 2 years ago. Inventory for all other periods is correctly computed.
2. An automobile dealer sells for $137,000 an extremely rare 1930 S type Invicta which it purchased for $21,000 10 years ago. The Invicta is the only such display item the dealer owns.
3. A drilling company during the current year extended the estimated useful life of certain drilling equipment from 9 to 15 years. As a result, depreciation for the current year was materially lowered.
4. A retail outlet changed its computation for bad debt expense from 1% to ½ of 1% of sales because of changes in its customer clientele. Concepts for Analysis 191 192 Chapter 4 Income Statement and Related Information.
5. A mining concern sells a foreign subsidiary engaged in uranium mining, although it (the seller) continues to engage in uranium mining in other countries.
6. A steel company changes from the average-cost method to the FIFO method for inventory costing purposes.
7. A construction company, at great expense, prepared a major proposal for a government loan. The loan is not approved.
8. A water pump manufacturer has had large losses resulting from a strike by its employees early in the year.
9. Depreciation for a prior period was incorrectly understated by $950,000. The error was discovered in the current year.
10. A large sheep rancher suffered a major loss because the state required that all sheep in the state be killed to halt the spread of a rare disease. Such a situation has not occurred in the state for 20 years.
11. A food distributor that sells wholesale to supermarket chains and to fast-food restaurants (two distinguishable classes of customers) decides to discontinue the division that sells to one of the two classes of customers. This represents a strategic shift in the company business.
From the foregoing information, indicate in what section of the income statement or retained earnings statement these items should be classified. Provide a brief rationale for your position.
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