Chapter 4: 7 (page 179)
How can earnings management affect the quality of earnings?
The quality of earnings is negatively affected by earnings management. Earnings management lowers the reliability element of income.
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(Single-Step Statement, Retained Earnings Statement, Periodic Inventory) Presented below is the trial balance of Thompson Corporation on December 31, 2017.
| THOMPSON CORPORATION | ||
| TRIAL BALANCE | ||
| DECEMBER 31, 2017 | ||
Debit (\() | Credit (\)) | |
Purchase Discounts | \(10,000 | |
Cash | \)189,700 | |
Accounts receivables | 105,000 | |
Rent Revenue | 18,000 | |
Retained Earnings | 160,000 | |
Salaries and Wages payable | 18,000 | |
Sales Revenue | 1,100,000 | |
Notes Receivables | 110,000 | |
Accounts payable | 49,000 | |
Accumulated Depreciation | 28,000 | |
Sales discount | 14,500 | |
Sales return and allowances | 17,500 | |
Notes payable | 70,000 | |
Selling expenses | 232,000 | |
Administrative expenses | 99,000 | |
Common Stock | 300,000 | |
Income tax expenses | 53,900 | |
Cash Dividends | 45,000 | |
Allowance for Doubtful Accounts | 5,000 | |
Supplies | 14,000 | |
Freight-In | 20,000 | |
Land | 70,000 | |
Equipment | 140,000 | |
Bonds Payable | 100,000 | |
Gain on Sale of Land | 30,000 | |
Accumulated Depreciation | 19,600 | |
Inventory | 89,000 | |
Buildings | 98,000 | |
Purchases | 610,000 | |
Totals | \(1,907,600 | \)1,907,600 |
A physical count of inventory on December 31 resulted in an inventory amount of \(64,000; thus, cost of goods sold for 2017 is \)645,000.
Instructions
Prepare a single-step income statement and a retained earnings statement. Assume that the only changes in retained earnings during the current year were from net income and dividends. Thirty thousand shares of common stock were outstanding the entire year.
State some of the more serious problems encountered in seeking to achieve the ideal measurement of periodic net income. Explain what accountants do as a practical alternative.
Charlie Brown, the controller for Kelly Corporation, is preparing the company’s income statement at year-end. He notes that the company lost a considerable sum on the sale of some equipment it had decided to replace. Since the company has sold equipment routinely in the past, Brown knows the losses cannot be reported as an unusual item. He also does not want to highlight it as a material loss since he feels that will reflect poorly on him and the company. He reasons that if the company had recorded more depreciation during the assets’ lives, the losses would not be so great. Since depreciation is included among the company’s operating expenses, he wants to report the losses along with the company’s expenses, where he hopes it will not be noticed.
Instructions
On January 30, 2016, a suit was filed against Frazier Corporation under the Environmental Protection Act. On August 6, 2017, Frazier Corporation agreed to settle the action and pay $920,000 in damages to certain current and former employees. How should this settlement be reported in the 2017 financial statements? Discuss.
Qualls Corporation reported 2017 earnings per share of \(7.21. In 2018, Qualls reported earnings per share as follows.
On income from continuing operations \)6.40
On discontinued operations \(1.88
On net income \)8.28
Is the increase in earnings per share from \(7.21 to \)8.28 a favorable trend?
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