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Operating expenses:
Salaries .............................................................. $160,000
Depreciation ...................................................... 50,000
Rent .................................................................. 25,000
Total operating expenses .............................. 235,000
Operating income ............................................... 345,000
4-1
Chapter 04 - The Income Statement and Statement of Cash Flows
Exercise 4-2
Requirement 1
* 40% x $467,200
4-2
Chapter 04 - The Income Statement and Statement of Cash Flows
Operating expenses:
Salaries ............................................................. $300,000
Depreciation ..................................................... 100,000
Rent .................................................................. 50,000
Loss from inventory write-down ..................... 200,000
Total operating expenses .............................. 650,000
Operating income ............................................... 499,700
* 40% x $467,200
4-3
Chapter 04 - The Income Statement and Statement of Cash Flows
Exercise 4-3
LINDOR CORPORATION
Statement of Income and Comprehensive Income
For the Year Ended December 31, 2011
Operating expenses:
Selling and administrative ............................................. 420,000
Operating income ............................................................ 480,000
* 30% x $440,000
4-4
Chapter 04 - The Income Statement and Statement of Cash Flows
Exercise 4-4
AXEL CORPORATION
Income Statement
For the Year Ended December 31, 2011
Operating expenses:
Selling .......................................................................... $67,000
Administrative ............................................................. 87,000
Restructuring costs ....................................................... 55,000
Total operating expenses ........................................... 209,000
Operating income ............................................................ 58,000
* 40% x $64,000
4-5
Chapter 04 - The Income Statement and Statement of Cash Flows
Exercise 4-5
CHANCE COMPANY
Partial Income Statement
For the Year Ended December 31, 2011
4-6
Chapter 04 - The Income Statement and Statement of Cash Flows
Exercise 4-6
Discontinued operations:
Income from operations of discontinued component
(including loss on disposal of $350,000) ................................. 150,000
Income tax expense .......................................................... 60,000
Income on discontinued operations .................................. 90,000
Net income ............................................................................ $642,000
4-7
Chapter 04 - The Income Statement and Statement of Cash Flows
Exercise 4-7
Requirement 1
*Includes only the operating loss during the year. There is no impairment loss.
4-8
Chapter 04 - The Income Statement and Statement of Cash Flows
Exercise 4-8
Pretax income from continuing operations $14,000,000
Income tax expense (5,600,000)
Income from continuing operations 8,400,000
Less: Net income 7,200,000
Loss from discontinued operations $1,200,000
4-9
Chapter 04 - The Income Statement and Statement of Cash Flows
Exercise 4-9
Requirement 1
In general, we report voluntary changes in accounting principles retrospectively.
However, a change in depreciation method is considered a change in accounting
estimate resulting from a change in accounting principle. In other words, a change in
the depreciation method reflects a change in the (a) estimated future benefits from the
asset, (b) the pattern of receiving those benefits, or (c) the company’s knowledge
about those benefits, and therefore the two events should be reported the same way.
Accordingly, Canliss reports the change prospectively; previous financial statements
are not revised. Instead, the company simply employs the straight-line method from
now on. The undepreciated cost remaining at the time of the change would be
depreciated using the straight-line method over the remaining useful life. A
disclosure note should justify that the change is preferable and should describe the
effect of the change on any financial statement line items and per share amounts
affected for all periods reported.
Requirement 2
Asset’s cost $800,000
Accumulated depreciation to date ($320,000 + 192,000) (512,000)
To be depreciated over remaining 3 years $288,000
Adjusting entry:
4-10
Chapter 04 - The Income Statement and Statement of Cash Flows
Exercise 4-10
Requirement 1
This is a change in accounting estimate.
Requirement 2
When an estimate is revised as new information comes to light, accounting for
the change in estimate is quite straightforward. We do not restate prior years'
financial statements to reflect the new estimate. Instead, we merely incorporate the
new estimate in any related accounting determinations from there on. If the after-tax
income effect of the change in estimate is material, the effect on net income and
earnings per share must be disclosed in a note, along with the justification for the
change.
Requirement 3
$800,000 Cost
$160,000 Previous annual depreciation ($800,000 ÷ 5 years)
x 2 years 320,000 Depreciation to date (2009-2010)
480,000 Book value
÷ 6 yrs. Estimated remaining life (8 years - 2 years)
$ 80,000 New annual depreciation
4-11
Chapter 04 - The Income Statement and Statement of Cash Flows
Exercise 4-11
Requirement 1
This is a change in accounting estimate.
Requirement 2
$2,400,000 Cost
$240,000 Previous annual amortization ($2,400,000 ÷ 10 years)
x 21/2 yrs. 600,000 Amortization to date (2009-2011)
1,800,000 Book value
÷ 5 yrs. Estimated remaining life (given)
$ 360,000 New annual amortization
Exercise 4-12
Earnings per share:
Income from continuing operations $5.00
Loss from discontinued operations (1.60)
Extraordinary gain 2.20
Net income $5.60
4-12
Chapter 04 - The Income Statement and Statement of Cash Flows
Exercise 4-13
Requirement 1
Requirement 2
4-13
Chapter 04 - The Income Statement and Statement of Cash Flows
Exercise 4-14
Requirement 1
U.S. GAAP also permits the presentation of other comprehensive income items
in the statement of shareholders’ equity.
Requirement 2
IAS No. 1 also allows companies to report other comprehensive income items in
either a combined statement of income and comprehensive income or in a separate
statement of comprehensive income. Presentation in the statement of shareholders’
equity is not permitted.
Exercise 4-15
1. b Purchase of equipment for cash.
2. a Payment of employee salaries.
3. a Collection of cash from customers.
4. c Cash proceeds from a note payable.
5. b Purchase of common stock of another corporation for cash.
6. c Issuance of common stock for cash.
7. b Sale of machinery for cash.
8. a Payment of interest on note payable.
9. d Issuance of bonds payable in exchange for land and building.
10. c Payment of cash dividends to shareholders.
11. c Payment of principal on note payable.
4-14
Chapter 04 - The Income Statement and Statement of Cash Flows
Exercise 4-16
Bluebonnet Bakers
Statement of Cash Flows
For the Year Ended December 31, 2011
4-15
Chapter 04 - The Income Statement and Statement of Cash Flows
Exercise 4-17
Cash collected for interest, considered an operating cash flow by U.S. GAAP,
could be classified as either an operating cash flow or an investing cash flow
according to International Accounting Standards.
Cash paid for interest, considered an operating cash flow by U.S. GAAP, could
be classified as either an operating cash flow or a financing cash flow according to
International Accounting Standards.
Cash paid for dividends, considered a financing cash flow by U.S. GAAP, could
be classified as either an operating cash flow or a financing cash flow according to
International Accounting Standards.
Accordingly, the statement of cash flows prepared according to IFRS could be
the same as under U.S. GAAP (E4-16) or could be presented as follows:
Bluebonnet Bakers
Statement of Cash Flows
For the Year Ended December 31, 2011
Cash flows from operating activities:
Collections from customers $ 380,000
Purchase of inventory (160,000)
Payment of salaries (90,000)
Payment of dividends (20,000)
Net cash flows from operating activities $110,000
Cash flows from investing activities:
Collection of note receivable 50,000
Interest on note receivable 6,000
Sale of investments 30,000
Purchase of equipment (85,000)
Net cash flows from investing activities 1,000
Cash flows from financing activities:
Proceeds from note payable 100,000
Payment of note payable (25,000)
Interest on note payable (5,000)
Net cash flows from financing activities 70,000
Net increase in cash 181,000
Cash and cash equivalents, January 1 17,000
Cash and cash equivalents, December 31 $ 198,000
4-16
Chapter 04 - The Income Statement and Statement of Cash Flows
Exercise 4-18
Cash flows from operating activities:
Net income $17,300
Adjustments for noncash effects:
Depreciation expense 7,800
Changes in operating assets and liabilities:
Increase in accounts receivable (4,000)
Decrease in inventory 5,500
Decrease in prepaid insurance 1,200
Decrease in salaries payable (2,700)
Increase in interest payable 800
Net cash flows from operating activities $25,900
4-17