Q4-1AAP
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. The 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
VerifiedThe earnings per share of the company are $3.76.
Financial statements refer to the reports containing one accounting period's financial information. Such reports reflect the summarized view of annual accounting information bifurcated in income statements, balance sheets, and cash flow statements.
Counting Crows Inc. | |
Income Statement | |
For the year ended December 31, 2017 | |
Particulars | Amounts ($) |
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 |
Counting Crows Inc. | |
Statement of Retained Earnings | |
For the year ended December 31, 2017 | |
Particulars | Amounts ($) |
Retained earnings, January 1, 2017 | 600,000 |
Add: Net income | 376,200 |
Less: Cash dividend declared | (80,000) |
Retained earnings, December 31, 2017 | 896,200 |
Counting Crows Inc. | |
Statement of Comprehensive Income | |
For the year ended December 31, 2017 | |
Particulars | Amounts ($) |
Net income | 376,200 |
Other comprehensive income |
|
Unrealized holding gain on available-for-sale securities | 17,000 |
Less: Applicable taxes | (2,000) |
Comprehensive income | 391,200 |
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.
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.