Question

7.	What effect would each of the following have on net income - increase or decrease? a) Decreasing estimated salvage value of equipment b) Writing off obsolete inventory c) Underestimating warranty claims d) Accruing a contingent liability for an ongoing lawsuit

1 8.	Which earnings per share figures must be disclosed on the face of an income statement of a public company?

1 9.

How would each of the following be reported in the income statement or balance sheet (whichever one(s) is(are) appropriate for the item)? Note any that would be part of comprehensive income. a) Investments by owners b) Distributions to owners c) Unrealized gains on available-for-sale securities d) Changes in accounting principles

Answer 1

7. a) Decrease, if salvage value of asset will decrease it will lead to increase in depreciation . And depreciation is deductible from income, it will decrease income,

b) Decrease, when we write off obsolete inventory it will be a loss for company and as a result of this profit will reduce.

c) underestimating warranty claims will lead to less liabiities and income will increase. It will show more income in income statement . But in actual, as amount to be payable is more , liability will be more and income will be less.

d) Decrease, Accruing a contingent liability for an ongoing lawsuit will increase the liabilities and profit will be reduced.

18. Following figures of EPS  must be disclosed on the face of an income statement of a public company :

- income from continuing operations

- disposals of business segments

- extraordinary items

- changes in accounting principles (to be disclosed separately)

19. a)Investments by owners will be recorded in balance sheet of the firm at fair value. If it is for short term out it under short term investment and if its for long term show it in long term investment under assets side.

b) Distributions to owners may include salary, commission, dividends or payment to equityholders or partners All distributions except dividend and bottom line payments must be shown in profit and loss account. Dividends are shown in balance sheet.

c) Unrealized gains on available-for-sale securities must be shown and reported as a separate line item in the stockholders' equity section of the balance sheet. It form part of comprehensive income.

d) Changes in accounting principles have to be disclosed in footnotes of financial statements (balance sheets)