Q1CA - Intermediate Accounting (Kieso)

Question

Question: O’Malley Corporation was incorporated and began business on January 1, 2017. It has been successful and now requires a bank loan for additional working capital to finance expansion. The bank has requested an audited income statement for the year 2017. The accountant for O’Malley Corporation provides you with the following income statement which O’Malley plans to submit to the bank.

O’MALLEY CORPORATION

INCOME STATEMENT

Sales revenue                                                                           \(850,000 

Dividends                                                                                       32,300 

Gain on recovery of insurance proceeds from 

earthquake loss                                                                            38,500

920,800 

Less: 

Selling expenses                                             \)101,100 

Cost of goods sold                                          510,000 

Advertising expense                                        13,700 

Loss on obsolescence of inventories            34,000 

Loss on discontinued operations                   48,600 

Administrative expense                                   73,400               780,800

Income before income tax                                                           140,000 

Income tax                                                                                     56,000 

Net income                                                                                  $84,000

Instructions 

Indicate the deficiencies in the income statement presented above. Assume that the corporation desires a single-step income statement.

Step-by-Step Solution

Answer

It is a must for business entities to present their income statement by following the proper guidelines and accounting standards. The accurate formatting and presentation make the data understandable and useful.

Step 1: Meaning of Income statement

The term income statement denotes an annual report prepared by the business entities to compute their net income or net loss earned by them during one accounting period. It contains the expenses and revenues of a company for the period they belong.

Step 2: Deficiencies in the income statement

The following deficiencies are detected in the income statement:

• The formatting of the income statement is inappropriate as it should include the period for which the income statement is being prepared. 

• The gain on recovery of insurance proceeds must be disclosed separately under the extraordinary items section because the same is non-recurring. 

• The cost of goods sold must be shown as the first expense, and then further expenses should be reported.

• The loss of obsolescence of inventories is an unusual item; hence must be disclosed separately.

• Earnings per share are not reflected in the given income statement; hence outstanding common stock is required to determine the same.