Q4-5CA - Intermediate Accounting (Kieso)

Question

The following financial statement was prepared by employees of Walters Corporation.

WALTERS CORPORATION

INCOME STATEMENT

THE YEAR ENDED DECEMBER 31, 2017

Revenues 

Gross sales, including sales taxes                                                   \(1,044,300 

Less: Returns, allowances, and cash discounts                                    56,200 

Net sales                                                                                                   988,100 

Dividends, interest, and purchase discounts                                         30,250 

Recoveries of accounts written off in prior years                                   13,850   

Total revenues                                                                                       1,032,200 

Costs and expenses 

Cost of goods sold, including sales taxes                                            465,900 

Salaries and related payroll expenses                                                    60,500 

Rent                                                                                                               19,100 

Delivery expense and freight in 3,400 

Bad debt expense                                                                                      27,800 

Total costs and expenses                                                                        576,700 

Income before other items                                                                     455,500 

Other items 

Loss on discontinued styles (Note 1)                                                         71,500 

Loss on sale of marketable securities (Note 2)                                       39,050 

Loss on sale of warehouse (Note 3)                                                         86,350 

Total other items                                                                                        196,900 

Net income                                                                                              \)258,600 

Net income per share of common stock                                                     \(2.30 

Note 1: New styles and rapidly changing consumer preferences resulted in a \)71,500 loss on the disposal of discontinued styles and related accessories. 

Note 2: The Corporation sold an investment in marketable securities at a loss of \(39,050. The corporation normally sells securities of this nature. 

Note 3: The Corporation sold one of its warehouses at an \)86,350 loss.

Instructions 

Identify and discuss the weaknesses in classification and disclosure in the single-step income statement above. You should explain why these treatments are weaknesses and what the proper presentation of the items would be in accordance with GAAP.

Step-by-Step Solution

Answer

According to the data provided in the question, the single-step income statement’s format is not accurate for presenting the accounting data available. 

Meaning of GAAP

The term GAAP refers to the Generally Accepted Accounting Principles issued by the Financial Accounting Standards Board (FASB). GAAP contains general rules, guidelines, and principles that help maintain the accounting information of a business concern.

Weaknesses in classification

In the single-step income statement, the business entity does not require to disclose the other items such as loss on discontinued, loss on sale of the warehouse, and so on. 

The single-step income statement contains the description of revenues and expenses to reflect the net income and associated earnings per share. 

Accurate presentation in accordance with GAAP

The accurate presentation in accordance with GAAP is as follows:

• According to the given accounting data, the company requires to use the format of an income statement rather than adopting a single-step income statement. 
• Further, the loss on the sale of marketable securities should be disclosed in the continuing operation section of the income statement. 
• Also, the loss on the sale of the warehouse should be reported as an extraordinary item section of the income statement because the same is a non-recurring event of the business. 
• In addition, the number of outstanding common stocks is required to review the earnings per share computations’ accuracy.