Chapter 11

The Income Statement and the Statement

of Stockholders Equity
Short Exercises
(5-10 min.) S 11-1
There are several ways that companies improperly recognize revenue, which results
in financial statement fraud.

a. Channel stuffing is when a company may ship inventory to regular customers in

amounts in excess of the amounts ordered by the customer. This usually occurs
near the end of the reporting period so that the excess merchandise cannot be
returned to the seller prior to the preparation of the financial statements.

b. Reporting revenue when a significant portion of the services are still to be

performed or goods are still to be delivered.

c. Providing incentives for customers to purchase more inventory than is needed in

return for future discounts or other benefits.

d. Reporting sales to fictitious or nonexistent customers; this may also include the
falsification of shipping and inventory records.

Chapter 11

The Income Statement and the Statement of Stockholders Equity

11-1

(10 min.) S 11-2

Req. 1
Gross profit = $703,935 thousand ($1,825,425 $1,121,490)
Income from continuing operations = $63,026 thousand
Net income = $60,626 thousand

Req. 2
Income from continuing operations = $63,026 thousand
Continuing operations will continue from period to period. Their continuity makes
income from continuing operations a good predictor of future net income.

11-2

Financial Accounting 9/e Solutions Manual

(10-15 min.) S 11-3

Amazing Way, Inc.
Income Statement
Year Ended December 31, 2012
(Thousands)
Net sales revenue............................................................................

$181,000

Cost of goods sold..........................................................................

73,000

Gross profit......................................................................................

108,000

Operating expenses.............................

55,000

Operating income............................................................................

53,000

Other gains (losses)........................................................................

(19,000)

Income from continuing operations before income tax..

34,000

Income tax expense (35%)..............................................................

11,900

Income from continuing operations..............................................

22,100

Loss on discontinued operations, $13,000,

less income tax savings of $4,550............................................
Income before extraordinary item..................................................

(8,450)
13,650

Extraordinary gain, $3,000,

less income tax of $1,050..........................................................

1,950

Net income........................................................................................

$ 15,600

Chapter 11

The Income Statement and the Statement of Stockholders Equity

11-3

(10-15 min.) S 11-4

Estimated value
of one share
of Mango stock

Earnings per share

Investment
capitalization rate

$2.20
.05

$44.00

Mangos stock is quoted at $94.02. At that price, an investor should sell because the
investor believes the stock is worth only $44.00.

Student responses will vary depending on the market price accessed by the student.

(10 min. ) S 11-5

Journal
DATE
Sept. 12

ACCOUNT TITLES AND EXPLANATION

Accounts Receivable (200,000 x $.34)....................

DEBIT
68,000

Sales Revenue.....................................................
..............................................................................
Oct.

18

68,000

Cash (100,000 x $.30)...............................................

30,000

Foreign-Currency Transaction Loss......................

4,000

Accounts Receivable ($68,000 x )

Nov.

15

Cash (100,000 x $.36)...............................................

Accounts Receivable..........................................
Foreign-Currency Transaction Gain..................

CREDIT

34,000
36,000
34,000
2,000
(10-15 min.) S 11-6

Req. 1
11-4

Financial Accounting 9/e Solutions Manual

Journal
DATE
Apr.

24

ACCOUNT TITLES AND EXPLANATION

Cash (900,000 pesos $0.099).............................
Accounts Receivable
(900,000 pesos $0.094)..........................
Foreign-Currency Transaction Gain..
Collection on account.

DEBIT

CREDIT

89,100
84,600
4,500

Req. 2
Oct.

25

Accounts Payable
(21,000 Swiss francs $1.12)................
Foreign-Currency Transaction Loss.
Cash (21,000 Swiss francs $1.14)...
Payment on account.

23,520
420
23,940

Req. 3
Both the Mexican peso and the Swiss franc strengthened against the U.S. dollar.
(15 min.) E 11-7
Req. 1
The discontinued operations were more like a revenue. This is clear from the fact
that their amount is added in determining net income.
Req. 2
The discontinued operations should be included in net income because they
represent revenues, which are a basic component of net income.

Req. 3
Chapter 11

The Income Statement and the Statement of Stockholders Equity

11-5

Use Income from continuing operations ($12,400 million) to predict future income
because that amount of income is most likely to repeat in future years.

11-6

Financial Accounting 9/e Solutions Manual

(5-10 min.) S 11-8

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

1.

Income Tax Expense ($117,000 .30).

Income Tax Payable ($91,000 .30)..........
Deferred Income Tax Liability..
Recorded income tax for the year.

DEBIT

CREDIT

35,100
27,300
7,800

2. INCOME STATEMENT
Income before income tax
Income tax expense...
Net income...

$117,000
(35,100)
$ 81,900

BALANCE SHEET
Current liabilities:
Income tax payable..

$ 27,300

Long-term liabilities:
Deferred income tax liability.

7,800

(10-15 min.) S 11-9

Earnings per share of common stock
(10,000 shares of common stock outstanding):
Income from continuing operations
[($22,100 $6,000) / 10,000]

$1.61

Loss on discontinued operations, net of tax

($8,450 / 10,000)

(0.85)

Income before extraordinary item

[($13,650 $6,000) / 10,000]
Chapter 11

The Income Statement and the Statement of Stockholders Equity

.76
11-7

Extraordinary gain, net of tax ($1,950 / 10,000)..

.20

Net income [($15,600 $6,000) / 10,000]..

$0.96
(5-10 min.) S 11-10

Req. 1
Amazing Way, Inc.
Income Statement (partial)
Year Ended December 31, 2012
Net income..........

$15,600

Other comprehensive income:

Unrealized gain on investments.

$1,100

Foreign-currency translation adjustment.

2,400

Comprehensive income.

3,500
$19,100

Req. 2
Earnings per share is not reported for other comprehensive income; it is reported
only for net income and its components.

(10 min.) S 11-11

Req. 1
Earnings
11-8

Net income preferred dividends

Financial Accounting 9/e Solutions Manual

per share

Average number of common shares outstanding

Req. 2
Earnings per share of common stock:
Income (loss) from continuing operations.....

$X.XX

Income (loss) from discontinued operations.

.XX

Income (loss) before extraordinary item........

X.XX

Extraordinary gain or loss..

.XX

Net income (net loss)

$X.XX

Req. 3
Earnings per share is useful because it relates a companys income to one share of
the companys stock. Because stock prices are quoted at an amount per share,
earnings per share is useful to help determine the value of one share of stock.

(10 min.) S 11-12

iLife Inc.
Statement of Retained Earnings
Year Ended December 31, 2012
Retained earnings balance, December 31, 2011,
as originally reported..

$70,000

Prior period adjustment debit to correct error

in 2011........

(18,000)

Retained earnings balance, December 31, 2011,

as adjusted........

52,000

Net income for 2012.........

85,000

Chapter 11

The Income Statement and the Statement of Stockholders Equity

11-9

137,000
Dividends for 2012
Retained earnings balance, December 31, 2012

11-10

Financial Accounting 9/e Solutions Manual

(29,000)
$108,000

(10 min.) S 11-13

Req. 1
$1,380,000

($200,000 + $1,180,000)

Req. 2
The stock dividend:

decreased retained earnings by $72,000

increased total paid-in capital by $72,000 ($30,000 + $42,000)

had no effect on total stockholders equity

had no effect on total assets

Req. 3
Cost of treasury stock purchased = $8,000
Cost of treasury stock sold = $3,000
Proceeds from sale of treasury stock = $13,000 ($3,000 + $10,000)

Req. 4

$70,000 ($185,000 + X $20,000 $72,000 = $163,000)

Req. 5

Comprehensive income is $89,000 ($70,000 + $9,000 + $10,000)

Chapter 11

The Income Statement and the Statement of Stockholders Equity

11-11

Addition to Accumulated Other Comprehensive Income is $19,000

$70,000)

11-12

Financial Accounting 9/e Solutions Manual

($89,000

(10-15 min.) S 11-14

Req. 1
Management of Westminster Computer Inc. is responsible for the companys
financial statements.

Req. 2
The accounting standard for financial statements is accounting principles generally
accepted in the United States of America (GAAP).

Req. 3
Management has established and maintains internal accounting control over
financial reporting to fulfill its responsibility for reliable financial information.

Req. 4
SLMA, LLP, auditors located in Aurora, Colorado, gave an outside opinion on
Westminsters financial statements. SLMA, LLP released its opinion on December
28, 2012.

Req. 5
The audit covered Westminsters consolidated balance sheets at September 30,
2012, and September 30, 2011, and consolidated income statements (statements of

Chapter 11

The Income Statement and the Statement of Stockholders Equity

11-13

operations), statements of shareholders equity and cash flows for the three years
ended September 30, 2012.

Req. 6
The standard for conducting an audit is the standards of the Public Company
Accounting Oversight Board (United States).
(continued) S 11-14

Req. 7
The auditor believed that Westminsters financial statements present fairly, in all
material respects, the financial position, results of operations, and cash flows for the
3-year period.

11-14

Financial Accounting 9/e Solutions Manual