Chapter 4: 14 (page 180)
How should correction of errors be reported in the financial statements?
In the financial statements, error correction is reported by adjusting to the beginning balance of retained earnings.
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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.
Instructions
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.
What are the advantages and disadvantages of the single-step income statement?
Which of the following statements is correct regarding income reporting under IFRS?
(a) IFRS does not permit revaluation of property, plant, equipment, and intangible assets.
(b) IFRS provides the same options for reporting comprehensive income as GAAP.
(c) Companies must classify expenses by nature.
(d) IFRS provides a definition for all items presented in the income statement.
Identify at least two situations in which application of different accounting methods or accounting estimates results in difficulties in comparing companies.
Roxanne Carter Corporation reported the following for 2017: net sales \(1,200,000, cost of goods sold \)750,000, selling and administrative expenses \(320,000, and an unrealized holding gain on available-for-sale securities \)18,000.
Instructions
Prepare a statement of comprehensive income, using (a) the one statement format and (b) the two statement format. (Ignore income taxes and earnings per share.)
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