1AAP - Intermediate Accounting (Kieso)

Question

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.

Step-by-Step Solution

Answer

The earnings per share of the company is $3.76.

Step 1: Meaning of Financial Statements

Financial statements refer to the reports containing one accounting period's financial information. Such reports reflect the summarized view of annual accounting information bifurcated in income statements, balance sheets, and cash flow statements. 

Step 2: Preparation of single-step income statement

Counting Crows Inc.
Income Statement
For the year ended December 31, 2017
Particulars	Amounts ($)
Sales revenue	1,900,000
Less: Cost of goods sold	(850,000)
Gross profit	1,050,000
Less: Selling expenses	(300,000)
Less: Administrative expenses	(240,000)
Income before other items	510,000
Other income and expenses
Rent revenue	102,700
Income before taxes	612,700
Income tax	(187,000)
Income from continuing operations	425,700
Discontinued operations
Loss on discontinued operations                            110,000
Less: Applicable income tax reduction                  (60,500)	(49,500)
Net income	376,200
Earnings per share
Income from continuing operations (425,700/100,000)	4.26
Loss on discontinued operations, net of tax (49,500/100,000)	(0.50)
Net income (376,200/100,000)	3.76

Step 3: Preparation of retained earnings statement

Step 4: Preparation of comprehensive income statement

Step 5: Usefulness of multi-step income statement

The multi-step income statement provides a detailed description of the operational and non-operational elements of the income statement. It facilitates the users to make effective and efficient decisions from the financial information.

The separation of accounting information in the income statement enables the analysts to compute various ratios for assessing a company’s performance.  

Step 6: Conceptual framework involved

The pro forma reporting is not consistent with the qualitative characteristic of accounting information associated with comparability. If Counting Crows Inc. classifies some financial elements in a pro forma manner and the same practice is not adopted by other companies, users of financial information will not be able to compare the data.