FINANCIAL REPORTING PROBLEM
(a) P&G uses the multiple-step income statement because it separates
operating from nonoperating activities. A multiple-step income statement
is used to recognize additional relationships related to revenues and
(b) P&G operates in the consumer products market. The company separates
its operations into five global segments: (sales by segment)
Fabric and Home Care, 32%
(c) P&G’s gross profit (Net Sales – Cost of Products Sold) was $32,535 million
in 2017, $32,390 million in 2016, and $33,423 million in 2015. P&G’s
gross profit increased by approximately .4% in 2017 compared to 2016.
The gross profit percentage increased slightly from 2016 to 2017 due
primarily to higher commodity and unfavorable foreign exchange
movement. (see MD&A).
COMPARATIVE ANALYSIS CASE
(a) Both companies use the multiple-step format in presenting income
statement information. Companies use the multiple-step income
statement to recognize additional relationships related to revenues and
(b) The gross profit, operating profit, and net income for these two companies
are as follows:
PepsiCo
2017
2016
2015
% Change
Sales ………………………….
$63,525
$62,799
$63,056
0.74%
Cost of Goods sold …….
Gross Profit ……………….
Operating Profit ………….
Net Income …………………
2017
2016
2015
% Change
$35,410
$41,863
$44,294
−20.06%
6,550
−83.95%
COMPARATIVE ANALYSIS CASE (Continued)
As shown in the table above, PepsiCo is performing at a better rate
than Coca-Cola. PepsiCo’s sales, gross profit, operating profit and net
FINANCIAL STATEMENT ANALYSIS CASE 1
(a) Given the ready availability, the analysis for Walgreens is provided
below:
Z-Score Analysis
Walgreens ($ 000,000)
2017
2016
Total Assets
$ 66,009
$ 72,668
Current Assets
$ 19,753
$ 25,883
Current Liabilities
$ 18,547
$ 17,013
2017
Working Capital
$ 1,206
$ 8,870
Multiple
Working Capital/Assets
0.018
1.2
0.1464
Retained Earnings
$ 30,137
$ 27,684
Retained Earnings/Assets
1.4
0.5334
EBIT
$ 5,557
$ 6,001
EBIT/Assets
3.3
0.2739
Sales
$118,214
$117,351
Sales/Assets
1.791
1.615
0.99
1.7731
1.5989
MV Equity
$ 83,448
$ 87,409
Total Liabilities
$ 37,735
$ 42,407
MV Equity/Total Liabilities
2.211
2.062
0.6
1.3266
1.2372
8/31/2016)
$ 28,274
FINANCIAL STATEMENT ANALYSIS CASE 1 (Continued)
(b) Walgreens’ Z-score in 2017 has increased and is well above the cutoff
score for companies that are unlikely to fail. The company has
improved on just about all components of the Z-score.
FINANCIAL STATEMENT ANALYSIS CASE 2
(a) Assumptions and estimates related to items such as bad debt expense,
warranties, or the useful lives or residual values for fixed assets could
result in income being overstated.
ACCOUNTING, ANALYSIS, AND PRINCIPLES
Accounting
COUNTING CROWS, INC.
Income Statement
For the Year Ending December 31, 2020
Revenues
Sales revenue
$1,900,000
Rent revenue
102,700
Total revenues
Expenses
Cost of goods sold
Selling expenses
Administrative expenses
Income tax expense
Income from continuing operations
425,700
Discontinued operations
Loss on discontinued operations
$110,000
Less: Applicable income tax reduction
60,500
(49,500)
Net income
$ 376,200
Income from continuing operations ($425,700 ÷ 100,000)
Net income ($376,200 ÷ 100,000)
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
COUNTING CROWS, INC.
Retained Earnings Statement
For the Year ended December 31, 2020
Retained earnings, January 1
$600,000
Retained earnings, December 31
$896,200
Unrealized holding gain, net of tax
15,000
Analysis
The multiple-step income statement recognizes important relationships
between income statement elements. For example, by separating operating
compute ratios for assessing the performance of the company.
Principles
Non-GAAP reporting is inconsistent with the conceptual framework’s qualita–
tive characteristic of comparability. For example, similar to the discussion
in the opening story, if Counting Crows Inc. classifies some items in a pro
CODIFICATION EXERCISES
CE4.1
According to the Glossary:
(a) A change in accounting estimate is a change that has the effect of adjusting the carrying amount
of an existing asset or liability or altering the subsequent accounting for existing or future assets or
liabilities. Changes in accounting estimates result from new information. Examples of items for
(b) A change in accounting principle reflects a change from one generally accepted accounting
principle to another generally accepted accounting principle when there are two or more generally
accepted accounting principles that apply or when the accounting principle formerly used is no
longer generally accepted. A change in the method of applying an accounting principle also is
CE4.2
According to FASB ASC 810-10–45-21 (Attributing Net Income and Comprehensive Income to the
Parent and the Noncontrolling Interest)
45–21 Losses attributable to the parent and the noncontrolling interest in a subsidiary may exceed their
interests in the subsidiary’s equity. The excess, and any further losses attributable to the parent
CE4.3
Entering “effect of preferred stock” in the search window yields the following link (FASB ASC 260-10–
S55): 260 Earnings per Share > 10 Overall > S55 Implementation Guidance and Illustrations.
General
Effect of Preferred Stock Dividends and Accretion of Carrying Amount of Preferred Stock on Earnings
S99-5 The following is the text of SAB Topic 6.B, Accounting Series Release 280—General Revision Of
Regulation S-X: Income Or Loss Applicable To Common Stock.
Facts: A registrant has various classes of preferred stock. Dividends on those preferred stocks
and accretions of their carrying amounts cause income applicable to common stock to be less
than reported net income.
Question: In ASR 280, the Commission stated that although it had determined not to mandate
presentation of income or loss applicable to common stock in all cases, it believes that disclo–
sure of that amount is of value in certain situations. In what situations should the amount be
reported, where should it be reported, and how should it be computed?
Interpretive Response: Income or loss applicable to common stock should be reported on the
CODIFICATION RESEARCH CASE
(a) FASB ASC 220 – Presentation, Comprehensive Income. The predecessor
standard for this topic is FAS No. 130 Reporting Comprehensive Income
(Issued June, 1997). By following this Codification String: Presentation
(c) Classifications within net income and examples (FASB ASC 220–10–45-7):
45-7 [Items included in net income are displayed in various
classifications. Those classifications can include income from
continuing operations and discontinued operations. This
Subtopic does not change those classifications or other
requirements for reporting results of operations.]
(d) The classifications within other comprehensive income (220-10–45–13):
Accounting Standards Update No. 2011-05–Comprehensive Income
(Topic 220)
Under the amendments to Topic 220, comprehensive Income, in this
CODIFICATION RESEARCH CASE (Continued)
(e) Reclassification adjustments (FASB ASC 220-10–45-15)
45–15 Reclassification adjustments shall be made to avoid double
counting in comprehensive income items that are displayed as
part of net income for a period that also had been displayed
as part of other comprehensive income in that period or earlier
IFRS CONCEPTS AND APPLICATION
IFRS4.1
Companies are required to present an analysis of expenses classified
IFRS4.2
(a) A loss on discontinued operations is reported, net of tax in a separate
IFRS4.3
Bradshaw should report this item similar to other unusual gains and losses.
IFRS4.4
Sales revenue ……………………………………………………….
$310,000
Cost of goods sold ……………………………………………………….
140,000
Selling and administrative expenses …………………………..
50,000
Gain on sale of plant assets ……………………………………………
30,000
Income from operations ………………………………………………….
150,000
Interest expense ……………………………………………………….
Income from continuing operations …………………………..
144,000
Discontinued operations …………………………………………………
Net income ……………………………………………………….
Attributable to:
(d)
Net income
Other comprehensive income…………………………..
$132,000
Comprehensive income …………………………………………………
$142,000
(e)
Retained earnings, beginning of year …………………………..
$ 0
Net income ……………………………………………………….
132,000
Dividends declared and paid ………………………………………….
Retained earnings, end of year …………………………..
IFRS4.5
(a) Some of the differences are:
1. Units of currency—Avon reports in pounds sterling and earnings
per share in pence.
and amortization.
(b) IFRS companies also report interest revenue and expense under a
separate heading in the income statement. This distinguishes income
IFRS4.6
(a) International Accounting Standard 1, Presentation of Financial
Statements addresses the statement of comprehensive income
reporting. This standard was issued in September 2007 and includes
IFRS4.6 (Continued)
Because the effects of an entity’s various activities, transactions and
other events differ in frequency, potential for gain or loss and
predictability, disclosing the components of financial performance
assists users in understanding the financial performance achieved
(d) When items of income or expense are material, an entity shall disclose
their nature and amount separately (Para. 97). Circumstances that
would give rise to the separate disclosure of items of income and
expense include:
a. write-downs of inventories to net realisable value or of property,
plant and equipment to recoverable amount, as well as reversals
IFRS4.7
(a) M&S uses a condensed format income statement. This format provides
highlights of a company’s performance without presenting unnecessary
detailed computations.
(d) M&S reports operating profit separately from nonoperating profit
because nonoperating profit is related to nonoperating revenue and
financing costs. In order to make valid comparisons between
companies and years, nonoperating must be reported separately from
operating profit.
—Changes to pay and pensions (£156.0m): On 25 May 2016, the
Group announced proposals for a fairer, simpler and more consistent
approach to pay and premia as well as proposals to close the UK
defined (DB) pension scheme to future accrual effective from 1 April
2017. The closure of the UK DB pension scheme to future accrual has
resulted in a curtailment charge of £127.0m. Other costs of £5.4m
IFRS4.7 (Continued)
—International store closures and impairments (£132.5m): The Group
has announced its intention to close its owned stores in ten
international markets, resulting in the recognition of a cost of £130.5m
in the period. The expected closure costs primarily relate to