Chapter 4: Question 6 (page 179)
What is earnings management?
Earnings management is a tool to present the company's financial statements and activities in a positive manner.
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Presented below are changes in all the account balances of Fritz Mayhew Furniture Co. during the current year, except for retained earnings.
Increase Increase
(Decrease) (Decrease)
Cash \(79,000 Accounts Payable
Accounts Receivable (net) \)45,000 Bonds Payable \(82,000
Inventory \)127,000 Common Stock \(125,000
Investments (47,000) Paid-In Capital in Excess of Par \)13,000
Instructions
Compute the net income for the current year, assuming that there were no entries in the Retained Earnings account except for net income and a dividend declaration of $19,000 which was paid in the current year.
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.
Generally accepted accounting principles usually require the use of accrual accounting to “fairly present” income. If the cash receipts and disbursements method of accounting will “clearly reflect” taxable income, why does this method not usually also “fairly present” income?
Question: Counting Crows Inc. provided the following information for the year 2017.
Retained earnings, January 1, 2017 $600,000
Administrative expenses 240,000
Selling expenses 300,000
Sales revenue 1,900,000
Cash dividends declared 80,000
Cost of goods sold 850,000
Loss on discontinued operations 110,000
Rent revenue 102,700
17,000
Income tax applicable to continuing operations 187,000
Income tax benefit applicable to loss on discontinued operations 60,500
Income tax applicable to unrealized holding
gain on available-for-sale securities 2,000
Accounting
Prepare
(a) a single-step income statement for 2017,
(b) a retained earnings statement for 2017, and
(c) a statement of comprehensive income using the two statement format. Shares outstanding during 2017 were 100,000.
Analysis
Explain how a multiple-step income statement format can provide useful information to a financial statement user.
Principles
In a recent meeting with its auditor, Counting Crows’ management argued that the company should be able to prepare a pro forma income statement with some one-time administrative expenses reported similar to discontinued operations. Is such reporting consistent with the qualitative characteristics of accounting information as discussed in the conceptual framework? Explain.
What are the advantages and disadvantages of the single-step income statement?
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