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.
Financial statements are the annual reports of a business concern containing the summarized information of one year’s financial information.
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.
Vandross Company has recorded bad debt expense in the past at a rate of 1½% of accounts receivable, based on an aging analysis. In 2017, Vandross decided to increase its estimate to 2%. If the new rate had been used in prior years, cumulative bad debt expense would have been $380,000 instead of $285,000. In 2017, bad debt expense will be $120,000 instead of $90,000. If Vandross’s tax rate is 30%, what amount should it report as the cumulative effect of changing the estimated bad debt rate?
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.
Tim Mattke Company began operations in 2015 and for simplicity reasons, adopted weighted-average pricing for inventory. In 2017, in accordance with other companies in its industry, Mattke changed its inventory pricing to FIFO. The pretax income data is reported below.
Year Weighted Average FIFO
2015 $370,000 $395,000
2016 390,000 $430,000
2017 410,000 $450,000
Show comparative income statements for Tim Mattke Company, beginning with income before income tax, as presented on the 2017 income statement.
Question: Willie Nelson, Jr., controller for Jenkins Corporation, is preparing the company’s financial statements at year-end. Currently, he is focusing on the income statement and determining the format for reporting comprehensive income. During the year, the company earned net income of $400,000 and had unrealized gains on available-for-sale securities of $15,000. In the previous year, net income was $410,000, and the company had no unrealized gains or losses.
(a) Show how income and comprehensive income will be reported on a comparative basis for the current and prior years, using the two statement format.
(b) Show how income and comprehensive income will be reported on a comparative basis for the current and prior years, using the one statement format.
(c) Which format should Nelson recommend?
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