P2-7. Determining income from continuing operations and gain
(loss) from discontinued operations
(AICPA adapted)
Requirements 1 and 2:
The amounts to be reported for income from continuing operations
after taxes excludes the losses from the discontinued operations.
Helen Corporation
Partial Income Statement
For the Years Ended December 31
2017 2016
Income from continuing operations,
Income from continuing operations,
before taxes (excluding discontinued
Provision for income taxes (35%)
784 ,000
595 ,000
Income from continuing operations,
Discontinued operations:
Loss from operation of discontinued
division, net of tax benefits of
$224,000 in 2017 and $175,000 in
The following analysis derives the adjusted income statements shown
above:
P2-8. Discontinued operations components held for sale
Silvertip Construction, Inc.
Partial Income Statement
For the Year Ended December 31, 2017
Income from continuing operations
$ 1,650,000
Discontinued operations:
Loss from operation of held for sale business
component, net of tax benefit of $33,250
*(61,750)
Impairment loss on held for sale component,
net of tax benefit of $24,185
**(44,915)
Net income
$ 1,543,335
Earnings per share:
Income from continuing operations
$ 1.65
Discontinued operations:
Loss from operation of held for sale business
component, net of tax
(0.06)
Impairment loss on held for sale component,
net of tax
(0.05)
Net income
$ 1.54
* Operating loss on component
** Impairment loss on component:
P2-9. Reporting a change in accounting principle
Requirement 1:
GAAP requires an entity to report a change in accounting principle through
retrospective application of the new accounting principle to all prior periods,
unless it is impracticable to do so, as is the case here. When it is
impracticable to determine the cumulative effect of applying a change in
Requirement 2:
Effective January 1, 2017 the Company adopted the LIFO cost flow
assumption for valuing its inventories. The Company believes that the use
of the LIFO method better matches current costs with current revenues. It
was not practical to apply the change retrospectively to prior years because
Note to the instructor: The effect on the change in inventory method on
2017 income is determined as follows:
P2-10. Disclosures for change in accounting principle
Requirement 1:
Restated cost of goods sold is determined as follows. (Bold items are given
in the problem):
Requirement 2:
Retrospective Application of a Change in Accounting Principle
During the fourth quarter of 2017, the Company elected to change
its method of valuing inventory to the weighted average cost
(“WAC”) method, whereas in all prior years inventory was valued
Company has applied this change retrospectively to the
consolidated financial statements for the years 2016 and 2015 as
required by FASB ASC Section 250: Accounting Changes and Error
Consolidated Statements of Operations for the fiscal year ended
December 31, 2016
2016 2016
As
LIFO previously
(in thousands) As restated
Adjustmen
t reported
Consolidated Balance Sheet as of December 31, 2016
LIFO As previously
(in thousands) As restated Adjustment reported
Assets
Current assets:
Shareholders’ Equity
Shareholders’ equity:
P2-11. Change in accounting policy
Requirement 1:
Under the new accounting method, in a year there is a cumulative gain
or loss in Accumulated other comprehensive income (AOCI) at the end
of the year, the amount by which that gain or loss exceeds the
recognition threshold is recognized in net income immediately and
“recycled” out of AOCI. There would be no recognition of gain or loss in
the subsequent year unless an additional gain or loss put the cumulative
The net effect of the change is to increase the volatility of reported
earnings. When cumulative gains and losses are past the threshold, the
Requirement 2:
Gains and losses on the pension plan are not related to the fundamental
operating profitability of the firm. So, it is important for an analyst to
understand how those gains and losses affect reported income. Through
P2-12. Manipulation of receivables
Accounts receivable turnover = sales ÷ average accounts
receivable.
Days sales outstanding = 365 ÷ Accounts receivable turnover.
A growing days sales outstanding figure is often a telltale sign that a
company’s receivables are impaired due to channel stuffing or other
revenue recognition issues. This growth results from receivables
growing at a faster rate than sales; the growth rate disparity is
P2-13. Correction of errors and worksheet preparation
Error corrections worksheet
Effect on income Accounts to be adjusted
Description 2015 2016 2017 Dr. Cr.
$4,900 $4,900
Item 2.
Accrued wages—2015 (12,000) 12,000 Counterbalancing error
Item 3.
Depreciation 3,500 (7,000) (6,000) Retained earnings,
Accumulated
Depr.,