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Chapter 4: Question 19 (page 180)

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?

Short Answer

Expert verified

Both the formats of income statement multi-step and single-step report the same net income.

Step by step solution

01

Financial Statements

Financial statements are the annual reports of a business concern containing the summarized information of one year’s financial information.

02

Explanation to Greg

According to the given scenario, the concerned person should be provided with the proper explanation of the two different formats of theincome 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.

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Most popular questions from this chapter

How can earnings management affect the quality of earnings?

Question: Below is the Retained Earnings account for the year 2017 for Acadian Corp.

Retained earnings, January 1, 2017 \(257,600

Add:

Gain on sale of investments (net of tax) \)41,200

Net income 84,500

Refund on litigation with government, related to

the year 2014 (net of tax) 21,600

Recognition of income earned in 2016, but omitted

from income statement in that year (net of tax) 25,400 172,700

430,300

Deduct:

Loss on discontinued operations (net of tax) 35,000

Write-off of goodwill (net of tax) 60,000

Cumulative effect on income of prior years in changing

from LIFO to FIFO inventory valuation in 2017 (net of tax) 23,200

Cash dividends declared 32,000 150,200

Retained earnings, December 31, 2017 $280,100

Instructions

  1. Prepare a corrected retained earnings statement. Acadian Corp. normally sells investments of the type mentioned above. FIFO inventory was used in 2017 to compute net income.

Question: (Earnings per Share) The stockholders’ equity section of Hendly Corporation appears below as of December 31, 2017.

8% preferred stock, \(50 par value, authorized

100,000 shares, outstanding 90,000 shares \)4,500,000

Common stock, \(1.00 par, authorized and issued 10 million shares 10,000,000

Additional paid-in capital 20,500,000

Retained earnings \)134,000,000

Net income 33,000,000167,000,000

\(202,000,000

Net income for 2017 reflects a total effective tax rate of 34%. Included in the net income figure is a loss of \)18,000,000 (before tax) as a result of a non-recurring major casualty. Preferred stock dividends of \(360,000 were declared and paid in 2017. Dividends of \)1,000,000 were declared and paid to common stockholders in 2017.

Instructions

Compute earnings per share data as it should appear on the income statement of Hendly Corporation.

Question: What is meant by the terms elements and items as they relate to the income statement? Why might items have to be disclosed in the income statement?

(Multiple-Step and Single-Step Statements) The accountant of Latifa Shoe Co. has piled the following information from the company’s records as a basis for an income statement for the year ended December 31, 2017.

Rent revenue \(29,000

Interest expense 18,000

Market appreciation on land above cost 31,000

Salaries and wages expense (selling) 114,800

Supplies (selling) 17,600

Income tax 37,400

Salaries and wages expense (administrative) \)135,900

Other administrative expenses 51,700

Cost of goods sold 496,000

Net sales 980,000

Depreciation on plant assets (70% selling, 30% administrative) 65,000

Cash dividends declared 16,000

There were 20,000 shares of common stock outstanding during the year.

Instructions

  1. Prepare a multiple-step income statement.
  2. Prepare a single-step income statement.
  3. (c) Which format do you prefer? Discuss.
See all solutions

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