Question

Counting Crows Ltd. provided the following information for the year 2019.

Retained earnings, January 1, 2019 £ 600,000

Administrative expenses 240,000

Selling expenses 300,000

Sales revenue 1,900,000

Cash dividends declared 80,000

Cost of goods sold 850,000

Gain on sale of investments 62,700

Loss on discontinued operations 75,000

Rent revenue 40,000

Unrealized holding gain on non-trading equity securities 17,000

Income tax applicable to continuing operations 187,000

Income tax benefit applicable to loss on discontinued operations 25,500

Income tax applicable to unrealized holding gain on non-trading equity securities 2,000

Weighted-average shares outstanding 100,000

Accounting

Prepare (a) an income statement for 2019, (b) a retained earnings statement for 2019, and (c) a statement of comprehensive income using the two statement format.

Analysis

Explain how income statement subheads can provide useful information to financial statement readers.

Principles

In a recent meeting with its auditor, Counting Crows' management argued that the company should be able to prepare a pro forma income statement, with some one-time administrative expenses reported similar to discontinued operations. Is such reporting consistent with the qualitative characteristics of accounting information as discussed in the Conceptual Framework? Explain.

Answer 1

ACCOUNTING

COUNTING CROWS LTD

Statement for the Income

For the Year Ended December 31, 2019

                                                                                                                                                                       

Sales revenue.................................................................................... £1,900,000

Cost of goods sold...........................................................................     850,000

Gross profit...................................................................................... 1,050,000

Selling expenses............................................................................... £300,000

Administrative expenses..................................................................     240,000 540,000

Other Income and expense

Gain on sale of investments................................................... 62,700

Rent revenue..........................................................................     40,000    102,700

Income before income tax................................................................ 612,700

Income tax.......................................................................................     187,000

Income from continuing operations................................................. 425,700

Discontinued operations

Loss on discontinued operations...................................................... 75,000

Less: Applicable income tax reduction...........................................     25,500    (49,500)

Net income....................................................................................... £ 376,200

Earnings per share*:

Income from continuing operations
(£425,700 ÷ 100,000).................................................................... £ 4.26

Loss on discontinued operations, net of tax....................................   (0.50)

Net income (£376,200 ÷ 100,000)................................................... £3.76

*Rounded

COUNTING CROWS LTD

Statement of Retained Earnings

For the Year Ended December 31, 2019

                                                                                                                                                                       

Retained earnings, January 1........................................................................................                 £600,000

Net income....................................................................................................................                   376,200

976,200

Dividends declared.......................................................................................................                   (80,000)

Retained earnings, December 31..................................................................................                 £896,200

COUNTING CROWS LTD

Statement of Comprehensive Income

For the Year Ended December 31, 2019

                                                                                                                                                                       

Net income................................................................................................................. £376,200

Other comprehensive income:

Unrealized holding gain, net of tax...........................................................................                        15,000

Comprehensive income..............................................................................................                    £391,200

ANALYSIS

The detailed income statement recognizes important relationships between income statement elements. For example, by separating operating transac­tions from nonoperating transactions, the statement user can distinguish between elements with differing implications for future operating results. In addition, the detailed format generally groups costs and expenses with related revenues (e.g., cost of goods sold with sales to yield a gross profit measure). Finally, the detailed format highlights certain intermediate compo­nents of income that analysts use to compute ratios for assessing the performance of the company.

PRINCIPLES

Pro forma reporting is inconsistent with the conceptual framework’s qualita­tive characteristic of comparability. For example, similar to the discussion in the opening story, if Counting Crows Inc. classifies some items in a pro forma manner but other companies do not, investors and creditors will not be able to compare the reported incomes.