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Chapter 4 The Income Statement, Comprehensive Income, and the
Statement of Cash Flows
94. Calstone, Inc., prepares a single, continuous statement of comprehensive income. The
following situations occurred during the company’s 2016 fiscal year:
1. Land that had been held as an investment was sold and a gain was recognized.
2. Losses from foreign currency translation were recognized.
3. Interest revenue was recognized.
4. A division was sold that qualifies as a separate component according to GAAP regarding
discontinued operations.
5. Unrealized losses on investments.
6. Restructuring costs were incurred due to downsizing and reorganization of a manufacturing
facility.
Required:
For each situation, identify the appropriate reporting treatment from the list below (consider
each event to be material).
a. As a component of operating income.
b. As a nonoperating income item (other income or expense).
c. As a discontinued operation.
d. As an item of other comprehensive income.
Answer:
Chapter 4 The Income Statement, Comprehensive Income, and the
Statement of Cash Flows
95. The following information is for Redwood Inc. for the year ended December 31, 2016.
Redwood had a cash and cash equivalents balance of $5,200 on January 1, 2016.
Cash received from:
Customers
$ 1,900
Interest on investments
200
Sale of land
100
Sale of common stock
600
Issuance of debt securities
2,000
Cash paid for:
Interest on debt
$ 300
Income tax
80
Debt principal reduction
1,500
Purchase of equipment
4,100
Purchase of inventory
1,000
Dividends on common stock
200
Operating expenses
500
Required: Prepare a statement of cash flows for the year using the direct method for operating
activities.
Chapter 4 The Income Statement, Comprehensive Income, and the
Statement of Cash Flows
96. The chief accountant for Julius Co. provides you with the company's most recent income
statement and comparative balance sheets below. The accountant has asked for your help in
preparing part of the company's 2016 statement of cash flows.
2016 Income Statement ($ in thousands)
Sales revenue
$5,000
Depreciation expense
280
Selling & administrative expenses
3,720 4,000
Income before taxes
1,000
Income tax expense
300
Net income
$700
Balance Sheet (all $ in thousands)
12/31/16
12/31/15
Cash
$800
$750
Accounts receivable
450
365
Property, plant & equipment
1,900
1,450
Less: Accumulated depreciation
( 800)
(520)
$2,350
$2,045
Payables for selling & administration expenses
300
325
Income taxes payable
180
130
Common stock
700
700
Retained warnings
1,170
890
$2,350
$2,045
Required:
In the space provided below, determine the cash flow from operating activities for Julius Co.,
using the direct method.
Chapter 4 The Income Statement, Comprehensive Income, and the
Statement of Cash Flows
97. The accounting records of Rockness Company provided the data below ($ in 000s).
Net income $25,200
Depreciation and amortization expense 3,300
Decrease in accounts receivable 2,000
Increase in inventory 4,500
Increase in prepaid insurance 300
Increase in salaries payable 900
Decrease in interest payable 400
Required:
Prepare a reconciliation of net income to net cash flows from operating activities.
Chapter 4 The Income Statement, Comprehensive Income, and the
Statement of Cash Flows
98. The statement of cash flows for the year ended December 31, 2016, for Whiteside
Incorporated is presented below.
Whiteside Incorporated
Statement of Cash Flows
For the Year Ended December 31, 2016
Cash flows from operating activities:
Collections from customers $420,000
Interest on note receivable 12,000
Dividends received 4,500
Purchase of inventory (156,000)
Payment of operating expenses (83,000)
Payment of interest on debt (16,000)
Net cash flows from operating activities $181,500
Cash flows from investing activities:
Sale of investments 42,000
Purchase of equipment (180,000)
Net cash flows from investing activities (138,000)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 200,000
Purchase of treasury stock (140,000)
Dividends paid (50,000)
Net cash flows from financing activities 10,000
Net increase in cash 53,500
Cash and cash equivalents, January 1 68,900
Cash and cash equivalents, December 31 $122,400
Required:
Prepare the statement of cash flows assuming that Whiteside prepares its financial statements
according to International Financial Reporting Standards. Where IFRS allows flexibility, use
the classification used most often in IFRS financial statements.
Chapter 4 The Income Statement, Comprehensive Income, and the
Statement of Cash Flows
Chapter 4 The Income Statement, Comprehensive Income, and the
Statement of Cash Flows
Essay
Instructions:
The following answers to essay questions point out the key phrases that should appear in students'
answers. They are not intended to be examples of complete student responses. It would be helpful to
provide instructions to students on how brief or in-depth you would like their answers to be.
99. Briefly explain when and why intraperiod tax allocation is necessary.
100. Briefly explain why the income statement is referred to as a change statement.
101. Net income, often referred to as "the bottom line," is not always a good predictor of future
income. Explain this statement.
Chapter 4 The Income Statement, Comprehensive Income, and the
Statement of Cash Flows
102. Explain, using an example, how a company can use earnings management and justify it by
conservatism.
103. In a recent press release, Foot Locker Inc. reported that its fiscal first-quarter net income fell
46% due to losses related to discontinued operations, but earnings from continuing operations
jumped 19% amid a modest increase in sales. The specialty athletic retailer said net income
was $20 million for the quarter ended May 4, compared with net income of $37 million a year
earlier. The latest results included a loss of $18 million from discontinued operations. Last
year, the company had earnings of $5 million, or four cents a share, from discontinued
operations. Foot Locker said earnings from continuing operations were $38 million, compared
with $32 million a year earlier. Discuss how Foot Locker's press release relates to its earnings
quality.
104. In a recent press release, Estee Lauder Co. reported "a fiscal fourth-quarter loss due to a
restructuring charge but said it expects to see earnings growth in its fiscal second through
fourth quarters." The New York skin care and cosmetics company reported a net loss of $25.4
million, or 13 cents a share, for the quarter ended June 30, compared with net income of $20.4
million, or six cents a share, a year earlier. Excluding the restructuring charge of $76.9
million, or 32 cents a share, the company said profit would have been $51.5 million, or 19
cents a share. Discuss how Estee Lauder's press release relates to its earnings quality.
105. Briefly define discontinued operations and explain how they are reported according to U.S.
GAAP.
Chapter 4 The Income Statement, Comprehensive Income, and the
Statement of Cash Flows
106. Presented below is an excerpt ($ in millions) from the 2014 annual report to shareholders of
Microsoft Corporation. Explain how the shareholder should interpret the difference between
the net income and total comprehensive income for Microsoft in 2014.
Comprehensive Income:
Net income
$21,863
Other comprehensive income (loss), net of
tax:
Net unrealized gains (losses) on derivatives
(26)
Foreign currency translation
(16)
Net unrealized gains on investments
363
Other comprehensive income
321
Total comprehensive income
$22,184
107. Give an example of a major investing activity cash outflow that would be reported in the
statement of cash flows for a manufacturing company.
Chapter 4 The Income Statement, Comprehensive Income, and the
Statement of Cash Flows
108. List at least four operating activities that would be reported in the statement of cash flows for
Walmart. Assume the use of the direct method.
109. Give an example of a noncash financing and investing activity and explain when and how it
would be reported in the financial statements.
