Company and group financial reporting 7th edition solutions

Preparing a multiple-step income statement Hardrock Mining Co. Per share disclosures are required on the face of the income statement for income from operations and items that follow on the income statement. Income statement presentation Event 1 is a discontinued operation and would appear on the income statement below income from continuing operations. To qualify for discontinued operation treatment, the sold component must represent a strategic shift having a major effect on the operations or results.

As the transactions are assumed to be material, this condition for discontinued operations treatment appears to be met. Event 2 would be reported as an unusual or infrequently occurring item and thus would be included in income from continuing operations. Event 3 is also an unusual or infrequently occurring item, included in income from continuing operations. Event 4 is a change in accounting principle and would require retrospective application i.

The current year income statement numbers would be based on the average cost method. The effect of the accounting principle change on the current period income numbers would be disclosed in a note to the financial statements explaining the accounting change.

Event 5 is a change in accounting estimate and thus would be included in income from continuing operations. No special income statement disclosure of this event is required. Depreciation expense in and beyond will be calculated using the new shorter lives. That is, the remaining book values will be depreciated over the remaining lives.

Event 6 is an unusual on infrequently occurring item and thus would be included in income from continuing operations. Event 7 is an unusual or infrequently occurring item and thus would be included in income from continuing operations.

GAAP reported Adjust. Determining loss on discontinued operations The results of operations of an entity classified as held for sale are to be reported in discontinued operations in the periods in which they occur net of tax effects.

These amounts will be recognized in as they occur. Determining period vs. They are traceable in that they can be assigned to units produced in the current period, even if that is done by some allocation method.

However, generally costs incurred after the production process is complete are treated as period costs. It is not an inventory cost that is part of Cost of goods sold, but it is still matched to the period of the related revenue. Therefore, it is generally treated as a period cost.

It is not an inventory cost that becomes part of cost of goods sold, but it is matched to the period of the related sale. Note that we determined these amounts differently. Inventory is a balance sheet account and we are given the amount by which it is misstated at December 31, In the case of accumulated depreciation — also a balance sheet account — we are not given the amount by which the account is misstated.

Instead, we are given the amount by which depreciation expense was misstated, and it is the cumulative misstatement in depreciation expense that will be the amount by which accumulated depreciation is misstated. Hence, we summed the depreciation expense misstatements to derive the accumulated depreciation misstatement. Amounts in the Inventory account at the beginning of a period or added to Inventory during the year are in one of two places at the end of the year.

They have either been expensed through cost of goods sold or are in the ending Inventory account balance. Therefore, for every dollar by which Inventory is too low, cost of goods sold, cumulatively over the life of the firm, has been too high. As a result, cumulative net income and therefore Retained earnings is also too low. Similarly for depreciation, for every dollar by which accumulated depreciation is too high, cumulative depreciation expense has been too high and therefore cumulative net income has been too low.

As a result, Retained earnings is understated and must be increased. Requirement 2: Assuming it is material, the error is corrected by restating all misstated periods retroactively. The financial statements will present prior periods as corrected. In addition, disclosures will show the financial statement effects of the error correction on each of the restated periods. When an equipment purchase is expensed rather than capitalized, net income is understated, causing Retained earnings to be understated.

And, for every dollar of depreciation that is not taken but should have been, cumulative depreciation expense has been too low and therefore cumulative net income has been too high. As a result, Retained earnings is overstated and must be increased. Correction of errors Requirement 1: a This error affected ending inventory in and beginning inventory in However, if comparative financial statements are issued in , income as presented for and must be restated to correct the error, making appropriate note disclosure of the correction.

The corrected financial statements would include a revision to Cost of goods sold for both and At the beginning of , accumulated depreciation should reflect depreciation for one year Requirement 2: a This error does not affect the financial statements. Requirement 1: Revaluations occur when the company hires and then receives a valuation report from a professional appraiser.

Because these changes in value are unrealized and the company has no current interest in realizing them through a sales transaction, the changes in value are reported in Other Comprehensive Income. If the company actually sold the property to realize the changes in value, then the changes would appear in Net Income. Requirement 2: The values of land and property, plant, and equipment went up because the company reports the Revaluation changes as increases in Other Comprehensive Income.

Requirement 3: U. GAAP does not allow for upward Revaluation of land or property, plant, and equipment. Therefore there would be no entry observed for Revaluation in Other Comprehensive Income.

Financial Reporting and Analysis 7th Ed. Revenue is recognized in because Frances Corp. Ralph Retailers, Inc. Requirement 2: Ralph Retailers, Inc. Requirement 3: Ralph Retailers, Inc. Understanding the accounting equation Flaps Inc. Item A: Current liabilities: Current liabilities plus noncurrent liabilities equals total liabilities. Item C: Additional paid-in capital: Common stock plus additional paid-in capital is equal to contributed capital.

Item D: Current assets: Current assets plus noncurrent assets equals total assets. Item I: Noncurrent liabilities: Current liabilities plus noncurrent liabilities is equal to total liabilities. Item J: Current assets: Current assets plus noncurrent assets equals total assets. Item L: Common stock: Common stock plus additional paid-in capital equals contributed capital.

Item M: Noncurrent assets: Current assets plus noncurrent assets equals total assets. Item S: Noncurrent liabilities: Current liabilities plus noncurrent liabilities is equal to total liabilities. Item T: Additional paid-in capital: Common stock plus additional paid-in capital is equal to contributed capital.

Item X: Noncurrent assets: Current assets plus noncurrent assets equals total assets. Understanding the accounting equation Bob Touret, Inc.

Items are not necessarily solved in alphabetical order. Item A: Current assets: Current assets plus noncurrent assets equals total assets.

Current liabilities plus noncurrent liabilities is equal to total liabilities. Item H: Current liabilities: Current assets less current liabilities equals working capital. Item F: Noncurrent assets: Current assets plus noncurrent assets equals total assets. Item L: Current assets: Current assets plus noncurrent assets equals total assets.

Item N: Current liabilities: Current assets less current liabilities equals working capital. Current liabilities plus noncurrent liabilities equals total liabilities. Item Q: Net income loss : Beginning of the year retained earnings plus net income less dividends equals end of the year retained earnings. Item R: Noncurrent assets: Current assets plus noncurrent assets equals total assets. Item T: Retained earnings: Beginning of the year retained earnings plus net income less dividends equals end of the year retained earnings.

Item W: Dividends: Beginning of the year retained earnings plus net income, less dividends, equals end of the year retained earnings. Item X: Current assets: Current assets less current liabilities equals working capital.

Journal entries and statement preparation a. Determining income from continuing operations and gain loss from discontinued operations AICPA adapted Requirements 1 and 2: The amounts to be reported for income from continuing operations after taxes excludes the losses from the discontinued operations.

Discontinued operations components held for sale Silvertip Construction, Inc. Reporting a change in accounting principle Requirement 1: GAAP requires an entity to report a change in accounting principle through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so, as is the case here. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to any prior period, the new accounting principle shall be applied as if the change were made prospectively as of the earliest date practicable.

The Company believes that the use of the LIFO method better matches current costs with current revenues. It was not practical to apply the change retrospectively to prior years because inventory records in prior years were not maintained on a LIFO basis.

LIFO method. The Company has determined that the WAC method of accounting for inventory is preferable as the method better reflects our inventory at current costs and enhances the comparability of our financial statements by changing to the predominant method utilized in our industry.

There would be no recognition of gain or loss in the subsequent year unless an additional gain or loss put the cumulative unrecognized amount past the threshold again. In contrast, under the old accounting method, only a portion of the excess is recognized in net income, leaving the unrecognized gain or loss above the threshold going into the next year.

Unless a loss or gain brought the cumulative unrecognized gain or loss within the threshold, there would be recognition of additional gain or loss in the subsequent year.

The net effect of the change is to increase the volatility of reported earnings. When cumulative gains and losses are past the threshold, the entire excess, rather than just a portion is recognized. However, there is then a smaller chance that an additional gain or loss would be recognized in the next year. Requirement 2: Gains and losses on the pension plan are not related to the fundamental operating profitability of the firm.

So, it is important for an analyst to understand how those gains and losses affect reported income. When the accounting for the gains and losses changes, how the analyst disentangles their effects changes. The actions taken, which were not disclosed, may have been intended to create an illusion of normal business activity and thus avert scrutiny of the growing trade receivables. Correction of errors and worksheet preparation Error corrections worksheet Effect on income Accounts to be adjusted Description Dr.

Accumulated Depreciation 3, 7, 6, Retained earnings, Depr. Gain on machinery Accumulated Depr. Conducting financial reporting research: Discontinued operations Requirement 1: FASB ASC Paragraph specifies the following criteria to be met in order to classify assets as held for sale: a.

Management commits to a plan to sell the assets. The assets are available for immediate sale in their present condition subject only to terms that are usual and customary for sales of such assets. An active program to locate a buyer and other actions required to complete the plan to sell the assets have been initiated. The sale of the assets is probable, and transfer of the assets is expected to qualify for recognition as a completed sale within one year. The assets are being actively marketed for sale at a price that is reasonable in relation to their current fair value.

Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Waiting for pending regulatory approval would qualify as such an exception if management reasonably expected approval would ultimately be granted. Thus, the intended sale of the Rohrback Cosasco Systems division should be treated as a discontinued operation.

Clearly, the unit in question is no longer available for immediate sale. While it is permissible to continue to classify assets as held for sale when conditions are unexpectedly imposed that delay transfer of the assets, actions must have been initiated— or will be initiated on a timely basis—to respond to the conditions. However, Corrpro has suffered losses from continuing operations in each of the last three years. These operating losses would appear even more severe if the losses from operations now classified as discontinued were included.

Given the focus of many analysts on continuing operations, management will likely prefer that these non-core business units remain classified as they were in Year 3. The new method of accounting was adopted to bring Neville Company into conformity with prevailing practices in its industry and comparative financial statements of prior years have been adjusted to apply the new method retrospectively.

The following financial statement line items for fiscal years and were affected by the change in accounting principle. Some distributors were given the right to return or exchange inventory they were unable to sell. Physically transferring inventory to a distributor, but not requiring the distributor to pay until the goods are resold, does not meet the criteria for revenue recognition. This case pre-dates the new revenue recognition rules, so the guiding principle would have been that the earnings process is substantially complete and collection is reasonably assured.

Those criteria are clearly not met in the circumstances described. Even under the new revenue recognition rules, it would have been inappropriate to recognize revenue. Determining loss on discontinued operations The results of operations of an entity classified as held for sale are to be reported in discontinued operations in the periods in which they occur net of tax effects. These amounts will be recognized in as they occur. Determining period vs.

They are traceable in that they can be assigned to units produced in the current period, even if that is done by some allocation method. However, generally costs incurred after the production process is complete are treated as period costs.

It is not an inventory cost that is part of Cost of goods sold, but it is still matched to the period of the related revenue. Therefore, it is generally treated as a period cost. It is not an inventory cost that becomes part of cost of goods sold, but it is matched to the period of the related sale.

Note that we determined these amounts differently. Inventory is a balance sheet account and we are given the amount by which it is misstated at December 31, In the case of accumulated depreciation — also a balance sheet account — we are not given the amount by which the account is misstated.

Instead, we are given the amount by which depreciation expense was misstated, and it is the cumulative misstatement in depreciation expense that will be the amount by which accumulated depreciation is misstated. Hence, we summed the depreciation expense misstatements to derive the accumulated depreciation misstatement.

Amounts in the Inventory account at the beginning of a period or added to Inventory during the year are in one of two places at the end of the year. They have either been expensed through cost of goods sold or are in the ending Inventory account balance. Therefore, for every dollar by which Inventory is too low, cost of goods sold, cumulatively over the life of the firm, has been too high.

As a result, cumulative net income and therefore Retained earnings is also too low. Similarly for depreciation, for every dollar by which accumulated depreciation is too high, cumulative depreciation expense has been too high and therefore cumulative net income has been too low.

As a result, Retained earnings is understated and must be increased. Requirement 2: Assuming it is material, the error is corrected by restating all misstated periods retroactively. The financial statements will present prior periods as corrected. In addition, disclosures will show the financial statement effects of the error correction on each of the restated periods.

When an equipment purchase is expensed rather than capitalized, net income is understated, causing Retained earnings to be understated. And, for every dollar of depreciation that is not taken but should have been, cumulative depreciation expense has been too low and therefore cumulative net income has been too high. As a result, Retained earnings is overstated and must be increased. Correction of errors Requirement 1: a This error affected ending inventory in and beginning inventory in However, if comparative financial statements are issued in , income as presented for and must be restated to correct the error, making appropriate note disclosure of the correction.

The corrected financial statements would include a revision to Cost of goods sold for both and At the beginning of , accumulated depreciation should reflect depreciation for one year Requirement 2: a This error does not affect the financial statements. Requirement 1: Revaluations occur when the company hires and then receives a valuation report from a professional appraiser.

Because these changes in value are unrealized and the company has no current interest in realizing them through a sales transaction, the changes in value are reported in Other Comprehensive Income. If the company actually sold the property to realize the changes in value, then the changes would appear in Net Income.

Requirement 2: The values of land and property, plant, and equipment went up because the company reports the Revaluation changes as increases in Other Comprehensive Income. Requirement 3: U. GAAP does not allow for upward Revaluation of land or property, plant, and equipment. Therefore there would be no entry observed for Revaluation in Other Comprehensive Income.

Financial Reporting and Analysis 7th Ed. Revenue is recognized in because Frances Corp. Ralph Retailers, Inc. Requirement 2: Ralph Retailers, Inc. Requirement 3: Ralph Retailers, Inc. Understanding the accounting equation Flaps Inc. Item A: Current liabilities: Current liabilities plus noncurrent liabilities equals total liabilities.

Item C: Additional paid-in capital: Common stock plus additional paid-in capital is equal to contributed capital. Item D: Current assets: Current assets plus noncurrent assets equals total assets. Item I: Noncurrent liabilities: Current liabilities plus noncurrent liabilities is equal to total liabilities. Item J: Current assets: Current assets plus noncurrent assets equals total assets.

Item L: Common stock: Common stock plus additional paid-in capital equals contributed capital. Item M: Noncurrent assets: Current assets plus noncurrent assets equals total assets. Item S: Noncurrent liabilities: Current liabilities plus noncurrent liabilities is equal to total liabilities.

Item T: Additional paid-in capital: Common stock plus additional paid-in capital is equal to contributed capital. Item X: Noncurrent assets: Current assets plus noncurrent assets equals total assets.

Understanding the accounting equation Bob Touret, Inc. Items are not necessarily solved in alphabetical order. Item A: Current assets: Current assets plus noncurrent assets equals total assets. Current liabilities plus noncurrent liabilities is equal to total liabilities. Item H: Current liabilities: Current assets less current liabilities equals working capital.

Item F: Noncurrent assets: Current assets plus noncurrent assets equals total assets. Item L: Current assets: Current assets plus noncurrent assets equals total assets. Item N: Current liabilities: Current assets less current liabilities equals working capital. Current liabilities plus noncurrent liabilities equals total liabilities.

Item Q: Net income loss : Beginning of the year retained earnings plus net income less dividends equals end of the year retained earnings. Item R: Noncurrent assets: Current assets plus noncurrent assets equals total assets. Item T: Retained earnings: Beginning of the year retained earnings plus net income less dividends equals end of the year retained earnings. Item W: Dividends: Beginning of the year retained earnings plus net income, less dividends, equals end of the year retained earnings.

Item X: Current assets: Current assets less current liabilities equals working capital. Journal entries and statement preparation a. Determining income from continuing operations and gain loss from discontinued operations AICPA adapted Requirements 1 and 2: The amounts to be reported for income from continuing operations after taxes excludes the losses from the discontinued operations. Discontinued operations components held for sale Silvertip Construction, Inc.

Reporting a change in accounting principle Requirement 1: GAAP requires an entity to report a change in accounting principle through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so, as is the case here. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to any prior period, the new accounting principle shall be applied as if the change were made prospectively as of the earliest date practicable.

The Company believes that the use of the LIFO method better matches current costs with current revenues. It was not practical to apply the change retrospectively to prior years because inventory records in prior years were not maintained on a LIFO basis.

LIFO method. The Company has determined that the WAC method of accounting for inventory is preferable as the method better reflects our inventory at current costs and enhances the comparability of our financial statements by changing to the predominant method utilized in our industry. There would be no recognition of gain or loss in the subsequent year unless an additional gain or loss put the cumulative unrecognized amount past the threshold again.

In contrast, under the old accounting method, only a portion of the excess is recognized in net income, leaving the unrecognized gain or loss above the threshold going into the next year. Unless a loss or gain brought the cumulative unrecognized gain or loss within the threshold, there would be recognition of additional gain or loss in the subsequent year. The net effect of the change is to increase the volatility of reported earnings. When cumulative gains and losses are past the threshold, the entire excess, rather than just a portion is recognized.

However, there is then a smaller chance that an additional gain or loss would be recognized in the next year. Requirement 2: Gains and losses on the pension plan are not related to the fundamental operating profitability of the firm. So, it is important for an analyst to understand how those gains and losses affect reported income. When the accounting for the gains and losses changes, how the analyst disentangles their effects changes. The actions taken, which were not disclosed, may have been intended to create an illusion of normal business activity and thus avert scrutiny of the growing trade receivables.

Correction of errors and worksheet preparation Error corrections worksheet Effect on income Accounts to be adjusted Description Dr. Accumulated Depreciation 3, 7, 6, Retained earnings, Depr. Gain on machinery Accumulated Depr.

Conducting financial reporting research: Discontinued operations Requirement 1: FASB ASC Paragraph specifies the following criteria to be met in order to classify assets as held for sale: a.

Management commits to a plan to sell the assets. The assets are available for immediate sale in their present condition subject only to terms that are usual and customary for sales of such assets.

An active program to locate a buyer and other actions required to complete the plan to sell the assets have been initiated. The sale of the assets is probable, and transfer of the assets is expected to qualify for recognition as a completed sale within one year. The assets are being actively marketed for sale at a price that is reasonable in relation to their current fair value.

Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Waiting for pending regulatory approval would qualify as such an exception if management reasonably expected approval would ultimately be granted. Thus, the intended sale of the Rohrback Cosasco Systems division should be treated as a discontinued operation.

Clearly, the unit in question is no longer available for immediate sale. While it is permissible to continue to classify assets as held for sale when conditions are unexpectedly imposed that delay transfer of the assets, actions must have been initiated— or will be initiated on a timely basis—to respond to the conditions. However, Corrpro has suffered losses from continuing operations in each of the last three years.

These operating losses would appear even more severe if the losses from operations now classified as discontinued were included. Given the focus of many analysts on continuing operations, management will likely prefer that these non-core business units remain classified as they were in Year 3. The new method of accounting was adopted to bring Neville Company into conformity with prevailing practices in its industry and comparative financial statements of prior years have been adjusted to apply the new method retrospectively.

The following financial statement line items for fiscal years and were affected by the change in accounting principle. Some distributors were given the right to return or exchange inventory they were unable to sell. Physically transferring inventory to a distributor, but not requiring the distributor to pay until the goods are resold, does not meet the criteria for revenue recognition.

This case pre-dates the new revenue recognition rules, so the guiding principle would have been that the earnings process is substantially complete and collection is reasonably assured.

Those criteria are clearly not met in the circumstances described. Even under the new revenue recognition rules, it would have been inappropriate to recognize revenue. Requirement 2 Following are the fiscal and income statements as originally reported and as restated amounts in thousands of dollars. Various parties were affected by the conduct of the Chief Accounting Officer and others in Mystery Technologies management.

Honesty in financial reporting: Although estimates are pervasive in the preparation of financial statements, accounts are expected to use their best expectations in making those estimates, and are not permitted to base estimates on desired reporting outcomes rather than beliefs about the underlying economics.

Full disclosure: Accountants are expected to provide disclosures that are sufficient to make the financial statements not misleading. Thus, failing to disclose the over-reserve was a violation of securities laws. This requirement is inconsistent with over-reserving in order to prop up subsequent period earnings artificially. While this drop in share price may have been purely the result of a down market at the time, suits were filed that allege otherwise.

Auditors and financial statement users must be aware of the incentives to manage earnings and the ways in which this is accomplished. All firms report basic EPS based on the weighted average number of shares actually outstanding during the period, while firms with complex capital structures also disclose diluted EPS, which reflects the EPS that would result if all potentially dilutive securities were converted into common shares.

These direct adjustments are called other comprehensive income components. Under U. GAAP, firms are required to report the components of other comprehensive income in either a single-statement format or a two-statement format. Revenue Recognition—General Concepts C. Financial Reporting and Analysis 7e Accrual Accounting and Income Determination Teaching Tip: For-profit entities adopt accrual accounting because of its ability to provide investors and creditors with a more realistic picture of relevant economic events and their effects on firm activities.

On the other hand, entities that do not have a profit motive may prefer a cash-basis accounting system because of its simplicity. Income Statement Format and Classification A. Income from Continuing Operations B. Discontinued Operations C.