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Question 19

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Intermediate Accounting (Kieso)
Found in: Page 180

Short Answer

You run into Greg Norman at a party and begin discussing financial statements. Greg says, “I prefer the single step income statement because the multiple-step format generally overstates income.” How should you respond to Greg?

Both the formats of income statement multi-step and single-step report the same net income.

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Step by Step Solution

Financial Statements

Financial statements are the annual reports of a business concern containing the summarized information of one year’s financial information.

Explanation to Greg

According to the given scenario, the concerned person should be provided with the proper explanation of the two different formats of the income statement.

The amount of net income remains the same in both cases; the only difference is that a multi-step income statement reports the revenues and expenses in a bifurcated form, such as operational and non-operational.

On the other hand, the single-step income statement presents the revenues and expenses in an aggregated way.

Most popular questions for Business-studies Textbooks

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.

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