Question

1. What are the three limitations of the income statement?

2. Can the terms net income and comprehensive income be used interchangeably? Why? Define both, net income and comprehensive income.

3. Explain the difference between a single-step and multiple-step income statement. Which statement is more transparent?

Answer 1

Solution:(1): Limitations of the income statement:

(a) There are certain revenues, expenses, gains and losses which can't be measured reliably and thus not reported in the income statement.

(b) There is also lack of comparability. Certain revenues, losses, gains and expenses can be manipulated by the management and even if it is not intentional, different judgement will lead to different numbers and figures.

(c) The measurement of income is dependent upon the accounting methods selected.

Solution:(2): No, the terms net income and comprehensive income can not be used interchangeably. This is because the net income is a component of the comprehensive income. The comprehensive income includes net income and other comprehensive income.

Net income represents the amount of money remaining after deducting COGS, Operating expenses, interest and taxes during a particular period.

Comprehensive income shows the variation in an entity's net assets from non-owner sources during a particular period. It includes net income and Unrealised income.

Solution:(3): Difference between a single-step and multi-step income statement:

• A single-step income statement format combines all revenues and expenses, gains and losses into a single category whereas, a multi-step income statement formats reports several subtotals before the computation of income from continuing operations and net income. It is more transparent compared to single--step income statement.

• The multi-purpose statement is more transparent because it tends to provide more clear information by separating different results of different operations.