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Chapter 4: 3 (page 179)

Identify at least two situations in which important changes in value are not reported in the income statement.

Short Answer

Expert verified

Unrealized gains or losses on investments that are available for sale and changes in the fair values of long-term liabilities are not recognized in the income statement.

Step by step solution

01

Meaning of Income statement

The income statement is used to measure a company's performance for a selected period.

02

Situations that are not reported in the income statement

Changes in fair value of long-term liabilities, Unrealized gains or losses on investment that are available for sale, changes in the values of intangible assets and property, plant, and equipment are some situations not reported in the income statement. These situations are considered essential to the company, but still, they are not included in the income statement.

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Most popular questions from this chapter

What is meant by “tax allocation within a period”? What is the justification for such practice?

Identify at least two situations in which important changes in value are not reported in the income statement.

How can earnings management affect the quality of earnings?

The financial records of LeRoi Jones Inc. were destroyed by fire at the end of 2017. Fortunately, the controller had kept certain statistical data related to the income statement as follows.XXX

  1. The beginning merchandise inventory was \(92,000 and decreased 20% during the current year.
  2. Sales discounts amount to \)17,000.
  3. 20,000 shares of common stock were outstanding for the entire year.
  4. Interest expense was \(20,000.
  5. The income tax rate is 30%.
  6. The cost of goods sold amounts to \)500,000.
  7. Administrative expenses are 20% of the cost of goods sold but only 8% of gross sales.
  8. Four-fifths of the operating expenses relate to sales activities.

Instructions

From the foregoing information prepare an income statement for the year 2017 in single-step form.

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?
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