Question

Misclassifcations Roz Corporation's Multiple-Step income statement and retained earnings statement for the year ended December 31, 2019 as developed by its bookkeeper are shown here:

Revenue Statement December 31, 2019
Sales (net)			$179,000
Plus: Income from operations of discontinued Division P (net of $960 income taxes)			2,240
Less: Dividends declared ($1.50 per common share)			(7,500)
Net revenues			$173,740
Less: Selling expenses			(19,000)
Gross profit			$154,740
Less Operating expenses:
Interest expense	$4,100
Loss on sale of Division P (net of $1,200 income tax credit)	2,800
Cost of goods sold	110,700
Income tax expense on income from continuing operations	5,370		(122,970)
Total operating expenses			$31,770
Operating income
Miscellaneous items:
Dividend revenue	$1,800
General and administrative expenses	(24,300)		(22,500)
Income before unusual items			$9,270
Unusual items:
Loss on sale of land	$(4,800)
Correction of error in last year's income (net of $1,500 income taxes)	3,500		(1,300)
Net income			$7,970

 

 

 

Retained Earnings Statement December 31, 2019
Beginning retained earnings	$62,850
Add: Net income	7,970
Adjusted retained earnings	$70,820
Less: Loss from theft (net of $2,760 income tax credit)	(6,440)
Ending retained earnings	$64,380

You determine that the account balances listed on the statements are correct but are incorrectly classified in certain cases. The company laces a 30% tax rate. No shares of common stock were issued or retired during 2019

Required:

1. Review both statements and indicate where each incorrectly classified item should be classified.

2 Prepare a correct multiple-step income statement for 2019

3. Determine the correct beginning balance in retained earnings and then prepare a correct 2019 retained earnings statement.

Answer 1

Financial statements can be defined as accounting records that tell us about the business firm's financial performance and financial position. Different types of financial statements that a company must publish are the income statement, statement of retained earnings, balance sheet, and cash flow statement. An income statement is a statement that determines the net income or net loss (financial performance) of the business during an accounting period. 

Part (1)

• Income from discontinued operations does not get adjusted before gross profit. It is treated in a separate section.
• The dividend declared does not come under the income statement. Payment of compensation is adjusted under the idea of retained earnings.
• Selling expenses are a part of operating expenses. It does not get adjusted before computing gross profit.
• Interest expenses are not a part of operating expenses.
• Loss on sale of division is not a part of operating expenses. It will be adjusted under the result of discontinued operations.
• The cost of goods sold should be adjusted from net revenues before computing gross profit.
• Income tax expense is not a part of operating expenses.
• General and administrative expenses are a part of operating expenses.
• Loss on sale of land should come under other items rather than unusual items
• Correction of error will be adjusted under the statement of retained earnings
• Loss from theft will be reported under the extraordinary (unique) items in the income statement.

Part (2)

Multi-step income statement:

Part (3)

Beginning balance of retained earnings:

Retained earnings statement of 2019:

Answers can be found in the Explanation section.