Professional Documents
Culture Documents
Question 4-2
Income from continuing operations includes the revenue, expense, gain, and loss transactions
that will probably continue in future periods. It is important to segregate the income effects of these
items because they are the most important transactions in terms of predicting future cash flows.
Question 4-3
Operating income includes revenues and expenses that are directly related to the principal
revenue generating activities of the company. Nonoperating income includes items that are not
directly related to these activities.
Question 4-4
The single-step format first lists all revenues and gains included in income from continuing
operations to arrive at total revenues and gains. All expenses and losses are then grouped and
subtotaled, subtracted from revenues and gains to arrive at income from continuing operations. The
multiple-step format reports a series (multiple) of intermediate totals such as gross profit, operating
income, and income before taxes. Very often income statements adopt variations of these formats,
falling somewhere in between the two extremes.
Question 4-5
The term earnings quality refers to the ability of reported earnings (income) to predict a
company’s future earnings. After all, an income statement simply reports on events that already
have occurred. The relevance of any historical-based financial statement hinges on its predictive
value.
Question 4-6
Restructuring costs include costs associated with shutdown or relocation of facilities or
downsizing of operations. They are reported as an operating expense in the income statement.
Question 4-7
The process of intraperiod tax allocation matches tax expense or tax benefit with each major
component of income, specifically continuing operations and any item reported below continuing
operations. The process is necessary to achieve the desired result of separating the total income
effects of continuing operations from the two separately reported items - discontinued operations
and extraordinary items, and also to show the after-tax effect of each of those two components.
Question 4-9
Extraordinary items are material gains and losses that are both unusual in nature and infrequent
in occurrence, taking into account the environment in which the entity operates.
Question 4-10
Extraordinary gains and losses are presented, net of tax, in the income statement below
discontinued operations, if any.
Question 4-12
A change in accounting estimate is accounted for in the year of the change and in subsequent
periods; prior years’ financial statements are not restated. A disclosure note should justify that the
change is preferable and should describe the effect of a change on any financial statement line items
and per share amounts affected for all periods reported.
Question 4-13
Prior period adjustments are accounted for by restating prior years’ financial statements when
those statements are presented again for comparison purposes. The beginning of period retained
earnings is increased or decreased on the statement of shareholders’ equity (or the statement of
retained earnings) in the year the error is discovered.
Question 4-15
Comprehensive income is the total change in equity for a reporting period other than from
transactions with owners. Reporting comprehensive income can be accomplished with a separate
statement or by including the information in either the income statement or the statement of changes
in shareholders’ equity.
Question 4-16
The purpose of the statement of cash flows is to provide information about the cash receipts
and cash disbursements of an enterprise during a period. Similar to the income statement, it is a
change statement, summarizing the transactions that caused cash to change during a particular
period of time.
Question 4-17
The three categories of cash flows reported on the statement of cash flows are:
1. Operating activities — Inflows and outflows of cash related to the transactions entering
into the determination of net income from operations.
2. Investing activities — Involve the acquisition and sale of (1) long-term assets used in the
business and (2) nonoperating investment assets.
3. Financing activities — Involve cash inflows and outflows from transactions with creditors
and owners.
Question 4-18
Noncash investing and financing activities are transactions that do not increase or decrease
cash but are important investing and financing activities. An example would be the acquisition of
property, plant and equipment (an investing activity) by issuing either long-term debt or equity
securities (a financing activity). These activities are reported either on the face of the statement of
cash flows or in a disclosure note.
Question 4-19
The direct method of reporting cash flows from operating activities presents the cash effect of
each operating activity directly on the statement of cash flows. The indirect method of reporting
cash flows from operating activities is derived indirectly, by starting with reported net income and
adding and subtracting items to convert that amount to a cash basis.
BRIEF EXERCISES
Brief Exercise 4-1
© The McGraw-Hill Companies, Inc., 2009
4-6 Intermediate Accounting, 5/e
PACIFIC SCIENTIFIC CORPORATION
Income Statement
For the Year Ended December 31, 2009
($ in millions)
Revenues and gains:
Sales .................................................................. $2,106
Gain on sale of investments .............................. 45
Total revenues and gains ............................... 2,151
Operating expenses:
Selling................................................................ $126
General and administrative................................ 105
Total operating expenses ............................... 231
Operating income ................................................ 635
*$645 x 40%
*$850,000 x 40%
Note: Restructuring costs, interest revenue, and loss on sale of investments are
included in income before income taxes and extraordinary item.
* $5,800,000 x 30%
© The McGraw-Hill Companies, Inc., 2009
Solutions Manual, Vol.1, Chapter 4 4-9
** Loss from operations of discontinued component:
* $5,800,000 x 30%
** Includes only the operating loss. There is no impairment loss.
$300,000
Cost
$ 50,000 Old annual depreciation ($300,000 ÷ 6 years)
x 2 years 100,000 Depreciation to date (2007-2008)
200,000 Book value
__ ÷ 8 yrs. Estimated remaining life (10 years - 2 years)
$ 25,000 New annual depreciation
Only these four cash flow transactions relate to operating activities. The others are
investing and financing activities.
EXERCISES
Exercise 4-1
Requirement 1
Operating expenses:
Salaries............................................................... $160,000
Depreciation....................................................... 50,000
Rent ................................................................... 25,000
Total operating expenses ............................... 235,000
Operating income ................................................ 345,000
Requirement 1
Exercise 4-2
© The McGraw-Hill Companies, Inc., 2009
4-14 Intermediate Accounting, 5/e
GENERAL LIGHTING CORPORATION
Income Statement
For the Year Ended December 31, 2009
* 40% x $467,200
* 40% x $467,200
Operating expenses:
Selling and administrative.............................................. 420,000
Operating income ............................................................. 480,000
* 30% x $440,000
Exercise 4-4
AXEL CORPORATION
Income Statement
For the Year Ended December 31, 2009
Operating expenses:
Selling .......................................................................... $67,000
Administrative .............................................................. 87,000
Restructuring costs ........................................................ 55,000
Total operating expenses ............................................ 209,000
Operating income ............................................................. 58,000
* 40% x $64,000
Exercise 4-5
CHANCE COMPANY
Partial Income Statement
For the Year Ended December 31, 2009
Exercise 4-6
© The McGraw-Hill Companies, Inc., 2009
4-18 Intermediate Accounting, 5/e
ESQUIRE COMIC BOOK COMPANY
Partial Income Statement
For the Year Ended December 31, 2009
Discontinued operations:
Income from operations of discontinued component
(including loss on disposal of $350,000) .................................. 150,000
Income tax expense ........................................................... 60,000
Income on discontinued operations ................................... 90,000
Net income............................................................................ 642,000
Discontinued operations:
Loss from operations of discontinued component
(including impairment loss of $50,000) * .............................. (190,000)
Income tax benefit............................................................. 76,000
Loss on discontinued operations ....................................... (114,000)
Net income .......................................................................... $ 286,000
Discontinued operations:
Loss from operations of discontinued component *......... (140,000)
Income tax benefit ............................................................ 56,000
Loss on discontinued operations ....................................... (84,000)
Net income .......................................................................... $ 316,000
*Includes only the operating loss during the year. There is no impairment loss.
Requirement 1
Exercise 4-10 In general, we report voluntary changes in accounting principles
retrospectively. However, a change in depreciation method is considered a change in
accounting estimate resulting from a change in accounting principle. In other words, a
change in the depreciation method reflects a change in the (a) estimated future benefits
from the asset, (b) the pattern of receiving those benefits, or (c) the company’s
knowledge about those benefits, and therefore the two events should be reported the
same way. Accordingly, Canliss reports the change prospectively; previous financial
statements are not revised. Instead, the company simply employs the straight-line
method from now on. The undepreciated cost remaining at the time of the change
would be depreciated using the straight-line method over the remaining useful life. A
disclosure note should justify that the change is preferable and should describe the
effect of the change on any financial statement line items and per share amounts
affected for all periods reported.
Requirement 2
Asset’s cost $800,000
Accumulated depreciation to date ($320,000 + 192,000) (512,000)
To be depreciated over remaining 3 years $288,000
Adjusting entry:
Depreciation expense (calculated above)...................... 96,000
Accumulated depreciation ....................................... 96,000
Requirement 1
Exercise 4-12
Requirement 2
Requirement 1
U.S. GAAP also permits the presentation of other
comprehensive income items in the statement of shareholders’
Exercise 4-13equity.
Requirement 2
IAS No. 1 also allows companies to report other comprehensive income items in either
a combined statement of income and comprehensive income or in a separate statement
of comprehensive income. Presentation in the statement of shareholders’ equity is not
permitted.
Bluebonnet Bakers
Exercise 4-15 Statement of Cash Flows
For the Year Ended December 31, 2009
Cash flows from operating activities:
Collections from customers $ 380,000
Interest on note receivable 6,000
Purchase of inventory (160,000)
© The McGraw-Hill Companies, Inc., 2009
Solutions Manual, Vol.1, Chapter 4 4-23
Interest on note payable (5,000)
Payment of salaries (90,000)
Net cash flows from operating activities $131,000
Cash flows from investing activities:
Collection of note receivable 50,000
Sale of investments 30,000
Purchase of equipment (85,000)
Net cash flows from investing activities (5,000)
Cash flows from financing activities:
Proceeds from note payable 100,000
Payment of note payable (25,000)
Payment of dividends (20,000)
Net cash flows from financing activities 55,000
Net increase in cash 181,000
Cash and cash equivalents, January 1 17,000
Cash and cash equivalents, December 31 $ 198,000
Wainwright Corporation
Statement of Cash Flows
For the Month Ended March 31, 2009
Tiger Enterprises
Exercise 4-19 Statement of Cash Flows
For the Year Ended December 31, 2009
($ in thousands)
Cash flows from operating activities:
Net income $ 900
Adjustments for noncash effects:
Depreciation expense 240
Changes in operating assets and liabilities:
Decrease in accounts receivable 80
Increase in inventory (40)
© The McGraw-Hill Companies, Inc., 2009
Solutions Manual, Vol.1, Chapter 4 4-27
Increase in prepaid insurance (30)
Decrease in accounts payable (60)
Decrease in administrative and other payables (100)
Increase in income taxes payable 50
Net cash flows from operating activities $1,040
Cash flows from investing activities:
Purchase of plant and equipment (300)
Cash flows from financing activities:
Proceeds from issuance of common stock 100
Proceeds from note payable 200
Payment of dividends (1) (940)
Net cash flows from financing activities(640)
Net increase in cash 100
Cash, January 1 200
Cash, December 31 $ 300
Retained earnings, beginning $540
(1) + Net income 900
- Dividends x x = $940
Retained earnings, ending $500
Based on the information in the T-accounts above, the operating activities section
of the SCF for Tiger Enterprises would be as shown next.
Tiger Enterprises
Statement of Cash Flows
For the Year Ended December 31, 2009
($ in thousands)
Cash flows from operating activities:
Collections from customers $ 7,080
Prepayment of insurance (130)
Payment to inventory suppliers (3,460)
Payment for administrative & other exp. (1,900)
Payment of income taxes (550)
Net cash flows from operating activities $ 1,040
The discontinued operations and the extraordinary gain are reported below
income from continuing operations.
4. a. The $400,000 impairment loss and the $1,000,000 loss from operations
should be combined for a total loss of $1,400,000.
5. d. The change in the estimate for warranty costs is based on new information
obtained from experience and qualifies as a change in accounting estimate.
A change in accounting estimate affects current and future periods and is not
accounted for by restating prior periods. The accounting change is a part of
continuing operations.
7. c. Issuing common stock for cash is considered a financing cash flow, not an
investing cash flow.
© The McGraw-Hill Companies, Inc., 2009
Solutions Manual, Vol.1, Chapter 4 4-31
© The McGraw-Hill Companies, Inc., 2009
4-32 Intermediate Accounting, 5/e
CMA Exam Questions
PROBLEMS
Problem 4-1
REED COMPANY
Comparative Income Statements
For the Years Ended December 31
2009 2008
Sales revenue ........................................................[1] $4,000,000 [6] $3,000,000
Cost of goods sold .................................................[2] 2,570,000 [7] 1,680,000
Gross profit ........................................................... 1,430,000 1,320,000
Operating expenses:
Administrative ....................................................[3] 750,000 [8] 635,000
Selling .................................................................[4] 340,000 [9] 282,000
Loss from fire damage ......................................... 50,000 --
Loss from write-down of obsolete inventory ...... 35,000 --
Total operating expenses ................................ 1,175,000 917,000
Operating income .................................................. 255,000 403,000
Other income (expense):
Interest revenue .................................................... 150,000 140,000
Interest expense ................................................... (200,000) (200,000)
Total other expenses (net) ............................... (50,000) (60,000)
Income from continuing operations before
income taxes and extraordinary item............... 205,000 343,000
Income tax expense ............................................... 82,000 137,200
Income from continuing operations before
extraordinary item.............................................. 123,000 205,800
© The McGraw-Hill Companies, Inc., 2009
Solutions Manual, Vol.1, Chapter 4 4-33
Discontinued operations:
Income (loss) from operations of discontinued
component (including loss on disposal of
$50,000 in 2009) ............................................... (10,000) 110,000
Income tax benefit (expense)................................ 4,000 (44,000)
Income (loss) on discontinued operations .........[5] (6,000) 66,000
Income before extraordinary item ........................ 117,000 271,800
Extraordinary item:
Loss from earthquake (net of $40,000 tax benefit) . (60,000) --
Net income ............................................................ $ 57,000 $ 271,800
Earnings per share:
Income from continuing operations before
extraordinary item.................................................... $ .41 $ .69
Discontinued operations ............................................ (.02) .22
Extraordinary loss ...................................................... (.20) --
Net income .................................................................. $ .19 $ .91
Requirement 1
Problem 4-2
JACKSON HOLDING COMPANY
Comparative Income Statements (in part)
For the Years Ended December 31
2009 2008
Income from continuing operations before
income taxes [1] .......................................... $3,000,000 $1,300,000
Income tax expense ......................................... 1,200,000 520,000
Income from continuing operations ................. 1,800,000 780,000
Discontinued operations:
Income from operations of discontinued
component (including gain on disposal of
$600,000 in 2009) [2] ....................................... 200,000 (300,000)
Income tax expense (benefit) ......................... 80,000 120,000
© The McGraw-Hill Companies, Inc., 2009
Solutions Manual, Vol.1, Chapter 4 4-35
Income (loss) on discontinued operations ..... 120,000 (180,000)
Net Income ...................................................... $1,920,000 $ 600,000
Problem 4-3Requirement 1
MICRON CORPORATION
Partial Income Statement
For the Year Ended December 31, 2009
Problem 4-5
ALEXIAN SYSTEMS, INC.
Income Statement
For the Year Ended December 31, 2009
Operating expenses:
Selling and administrative ................................ [2] $128
Restructuring costs ........................................... 26
Total operating expenses ............................... 154
Operating income ................................................ 6
Other income:
Interest revenue ................................................. 3
Gain on sale of assets ....................................... 6
Total other income ........................................ 9
Income before income taxes and extraordinary
item .................................................................. 15
Income tax expense ............................................. [3] 6
Income before extraordinary item ....................... 9
Extraordinary gain (net of $48 in taxes) ..................... [4] 72
Net income .......................................................... $ 81
Problem 4-6
REMBRANDT PAINT COMPANY
Income Statement
For the Year Ended December 31, 2009
($ in thousands, except per share
amounts)
Sales revenue .................................................................... $18,000
Cost of goods sold ............................................................ 10,500
Gross profit ....................................................................... 7,500
Operating expenses:
Selling and administrative ............................................ $2,500
Restructuring costs ........................................................ 800 3,300
Operating income ............................................................. 4,200
Interest income (expense), net ......................................... (150)
Income from continuing operations before income taxes
and extraordinary item ................................................. 4,050
Income tax expense .......................................................... 1,215
Income from continuing operations before extraordinary
item ............................................................................... 2,835
Discontinued operations:
Income from operations of discontinued component
(including gain on disposal of $2,000) .................................. 400
Income tax expense ....................................................... 120
Income on discontinued operations ............................. 280
Income before extraordinary item .................................... 3,115
Extraordinary gain (net of $900 tax expense) ..................... 2,100
Net income........................................................................ 5,215
Note:
The depreciation expense error is a prior period adjustment (to retained earnings) and is not
reported in the income statement.
Operating expenses:
General and administrative .......................................... $1,000,000
Selling ......................................................................... 500,000
Restructuring costs ....................................................... 300,000
Loss from write-down of obsolete inventory 400,000
Total operating expenses .......................................... 2,200,000
Operating income ............................................................ 3,800,000
Notes:
1. The restructuring costs and the loss from write-down of inventory are not extraordinary items.
2. The depreciation expense error is a prior period adjustment and is not reported in the
income statement.
Requirement 1
Problem 4-9 Diversified Portfolio Corporation
Statement of Cash Flows
For the Year Ended December 31, 2009
Requirement 1
Problem 4-10
2008 Cash:
2008 Cash + Net increase in cash = 2009 Cash
2008 Cash + 61 = 120
2008 Cash = 59
2009 A/R:
2008 A/R + Cr. Sales – Cash collections = 2009 A/R
84 + 80 – 71 = 93
2008 Inventory:
2008 A/P + Purchases – Cash Paid = 2009 A/P
30 + Purchases – 30 = 40
Therefore, Purchases = 40
2008 Inventory + Purchases – 2009 Inventory = Cost of goods sold
2008 Inventory + 40 – 60 = 32
2008 Inventory = 52
Grandview Corporation
Statement of Cash Flows
For the Year Ended December 31, 2009
($ in millions)
Cash flows from operating activities:
Net income $ 28
Adjustments for noncash effects:
Depreciation expense 10
Gain on sale of equipment (15)
Changes in operating assets and liabilities:
Increase in accounts receivable1 (9)
Increase in inventory2 (8)
Increase in accounts payable3 10
Decrease in income taxes payable4 (2)
Net cash flows from operating activities $14
1
$93 – 84
2
$60 – 52
3
$40 – 30
4
$22 – 24
Santana Industries
Problem 4-11 Statement of Cash Flows
For the Year Ended December 31, 2009
($ in thousands)
Cash flows from operating activities:
Net income $ 3,850
Adjustments for noncash effects:
Depreciation expense 1,600
Changes in operating assets and liabilities:
Increase in accounts receivable (300)
Increase in inventory (1,000)
Decrease in prepaid rent 150
Increase in accounts payable 300
Increase in interest payable 100
© The McGraw-Hill Companies, Inc., 2009
Solutions Manual, Vol.1, Chapter 4 4-47
Increase in unearned service revenue 200
Decrease in income taxes payable (250)
Net cash flows from operating activities $4,650
Cash flows from investing activities:
Purchase of equipment (4,000)
Sale of equipment 500
Net cash flows from investing activities (3,500)
Cash flows from financing activities:
Proceeds from loan payable 5,000
Payment of dividends (1,000)
Net cash flows from financing activities 4,000
Net increase in cash 5,150
Cash, January 1 2,200
Cash, December 31 $7,350
CASES
Judgment Case 4-1
Requirement 1
The term earnings quality refers to the ability of reported earnings (income) to
predict a company’s future earnings. After all, an income statement simply reports on
events that already have occurred. The relevance of any historical-based financial
statement hinges on its predictive value.
Requirement 2
To enhance predictive value, analysts try to separate a company’s transitory
earnings effects from its permanent earnings. Transitory earnings effects result from
transactions or events that are not likely to occur again in the foreseeable future, or
that are likely to have a different impact on earnings in the future.
Requirement 3
An often-debated contention is that, within GAAP, managers have the power, to a
limited degree, to manipulate reported company income. And the manipulation is not
always in the direction of higher income. Many believe that manipulating income
reduces earnings quality because it can mask permanent earnings.
Requirement 4
You would consider the size of the gain in relation to net income, the size of the
company’s investment portfolio, and the frequency of gains and losses from the sale
Requirement 1
Real World Case 4-4 Companies often voluntarily provide a pro forma
earnings number when they announce annual or quarterly earnings calculated
according to GAAP. These pro forma earnings numbers are management’s view of
permanent earnings. These pro forma earnings numbers are controversial as they
represent management’s biased view of permanent earnings and should be interpreted
in that light.
Requirement 2
The term earnings quality refers to the ability of reported earnings (income) to
predict a company’s future earnings. Management believes that pro forma earnings
are of much higher quality than reported earnings because they are more indicative of
future profitability.
Writing (30%)
_______ 6 Terminology and tone appropriate to the audience of a chief
financial officer.
_______ 12 English
______ Sentences grammatically clear and well organized,
concise.
______ Word selection.
______ Spelling.
______ Grammar and punctuation.
______
© The McGraw-Hill Companies, Inc., 2009
Solutions Manual, Vol.1, Chapter 4 4-51
_______ 30 points
RE: Income Statement treatment of October 17, 1989, earthquake damage costs.
RECOMMENDATION
I recommend that the earthquake damage costs be treated as an extraordinary
loss, net of tax, in the income statement for the fiscal year ended August 4, 1990. In
addition, earnings per share for income both before and after the loss must be
presented. While many earthquakes do occur in California, extremely large
earthquakes causing significant amounts of damage are both unusual and infrequent. I
do not believe that this type of loss will occur again in the foreseeable future.
Requirement 1
IFRS Case 4-11 U.S. GAAP, SFAS No. 144, considers a discontinued
operation to be a component of an entity whose operations and
cash flows can be clearly distinguished from the rest of the entity that has either been
disposed of or classified as held for sale. IFRS No. 5 also defines a discontinued
operation as a component of an entity that has been disposed of or is classified as held
for sale. What constitutes a component of an entity, however, differs considerably
between the international standard and SFAS No. 144. IFRS No. 5 considers a
component to be primarily either a major line of business or geographical area of
operations. The U.S. definition is much broader than its international counterpart.
Requirement 2
In 2006, Cadbury disposed of its South African beverage business. This would
qualify as a discontinued operation because the company is exiting a geographical
location. The disposal of this segment would most likely be an operation “whose
operations and cash flows can be clearly distinguished from the rest of the entity” thus
qualifying as a component of the entity according to U.S. GAAP as well.
Requirement 2
Situations 3, 5, and 8 would be reported in the statement of income and
comprehensive income net-of-tax. Also, the net-of-tax effect of the correction of the
amortization error, situation 7, would increase or decrease retained earnings.
that managers of companies with bonus plans are more likely to choose accounting
methods that maximize their bonuses (often those that increase net income). Other 2
research has indicated that the existence and nature of debt agreements and other
aspects of a firm’s capital structure can influence accounting choices. Whether a 3
company is forbidden from paying dividends if retained earnings fall below a certain
level, for example, can affect the choice of accounting methods.
Choices made are not always those that tend to increase income. As you will
learn in Chapter 8, many companies use the LIFO inventory method because it
reduces income and therefore reduces the amount of income taxes that must be paid
1 Watts, R.L. and J.L. Zimmerman, “ Towards a Positive Theory of the Determination of Accounting Standards,” The
Accounting Review, January, 1978, and “Positive Accounting Theory: A Ten Year Perspective,” The Accounting
Review, January, 1990.
2 For example, see Healy, P.M., “The Effect of Bonus Schemes On Accounting Decisions,” Journal of Accounting and
Economics, April, 1985, and Dhaliwal, D.G. Salamon, and E. Smith, “The Effect of Owner Versus Management
Control On The Choice Of Accounting Methods,” Journal of Accounting and Economics, July, 1982.
3 Bowen, R.M., E.W. Noreen, and J.M. Lacy, “Determinants of the Corporate Decision To Capitalize Interest,”
Journal of Accounting and Economics,” August, 1981.
© The McGraw-Hill Companies, Inc., 2009
Solutions Manual, Vol.1, Chapter 4 4-57
currently. Also, some very large and visible companies might be reluctant to report
high income that might render them vulnerable to union demands, government
regulations, or higher taxes. 4
4 This “political cost’ motive is suggested by Watts, R.L. and J.L. Zimmerman, “ “Positive Accounting Theory: A Ten
Year Perspective,” The Accounting Review, January, 1990, and Zmijewski, M., and R. Hagerman, “An Income
Strategy Approach To The Positive Theory of Accounting Standard Setting/Choice,” Journal of Accounting and
Economics, August, 1981.
© The McGraw-Hill Companies, Inc., 2009
4-58 Intermediate Accounting, 5/e
the net amount. Also, the method used to compute depreciation should be
disclosed in a note.
6. The liability and shareholders' equity section of the balance sheet should be
classified into (1) current liabilities, (2) long-term liabilities, and (3)
shareholders' equity.
7. Current liabilities should include accounts payable and accruals, notes payable
(the $80,000 note due in 2007 and the $60,000 installment on note # 2 due in
2007). The latter should be classified as current maturities of long-term debt.
Also, note disclosure is required for the notes providing information such as
payment terms, interest rates, and collateral pledged as security for the debt.
8. Long-term liabilities should include the $60,000 second installment on note
#2.
9. Common stock - the par value, if any, and the number of shares authorized,
issued and outstanding should be disclosed.
Income Statement:
1. The miscellaneous expense should be classified as an extraordinary item and
shown net of tax below income from continuing operations. A note should
describe the event.
2. Earnings per share disclosure is required.
3. The restructuring charges should be shown as a separate operating expense
item in the income statement and described in a note.
Requirement 1
Financial Analysis Case 4-16 2006 to 2007: ($4,203,720 - 3,077,446) ÷
$4,203,720 = 27% increase
Requirement 2
Provision for income taxes ÷ Income before taxes
$1,470,260 ÷ $5,673,980 = 26% = approximate income tax rate
Requirement 3
$4,203,720 ÷ $16,593,986 = 25%
Answers to the questions will, of course, vary
Real World Case 4-17because students will research financial statements of
different companies.
No specific standards dictate how income from continuing operations must be
displayed, so companies have considerable latitude in how they present the
components of income from continuing operations. This flexibility has resulted in a
© The McGraw-Hill Companies, Inc., 2009
Solutions Manual, Vol.1, Chapter 4 4-59
considerable variety of income statement presentations. However, we can identify
two general approaches, the single-step and the multiple-step formats that might be
considered the two extremes, with the income statements of most companies falling
somewhere in between.
The presentation of separately reported items, however, is mandated and students
should be able to easily identify them.